Brunswick Corporation (NYSE:BC) Q4 2023 Earnings Call Transcript

Brunswick Corporation (NYSE:BC) Q4 2023 Earnings Call Transcript February 1, 2024

Brunswick Corporation misses on earnings expectations. Reported EPS is $1.45 EPS, expectations were $1.66. Brunswick Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

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

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

Dave Foulkes: Thanks, Neha, and good morning, everyone. Brunswick delivered another successful year in which we achieved the second highest sales and adjusted earnings per share in company history, despite market headwinds. We also continued to gain market share, increase our operational efficiency, launch exceptional new products, actively control costs and progress our strategic initiatives, including our ACES strategy. Our full year net sales of $6.4 billion and adjusted earnings per share of $8.80 were slightly below our guidance range as wholesale customer ordering patterns softened late in the year. However, our diligent focus on cash generation resulted in outstanding free cash flow of $473 million and full year free cash flow conversion of 76%.

In addition, we executed $275 million of share repurchases. Mercury Marine has continued to capture solid market share, with full year U.S. outboard retail share up 50 basis points versus prior year. 2023 U.S. new boat market unit retail sales are anticipated to finish in line with our estimates of down mid‐to-high single digits with Brunswick brands outperforming the market in many segments. As we moved out of the core 2023 retail selling season, we worked closely with our marine channel partners to actively manage boat field inventory levels. We closed the year with 36.7 weeks on hand in the U.S., which is in line with our target and with historical norms. I will now turn to some of the segment highlights for the quarter and full year. Our Propulsion business finished its second best year on record, leveraging more exciting new products, market share gains and operational efficiencies to deliver consistent year‐over‐year operating margins, despite slightly lower sales and earnings versus the historical highs in 2022.

For the full year, Mercury gained 150 basis points of overall U.S. retail share for outboard engines over 30 horsepower, which account for the majority of Mercury’s investment in recent years. In addition, over 5,000 Avator electric outboards were produced following the launch of the first model in early 2023. Mercury saw slowing of OEM off‐season orders as the OEMs scaled back boat production to control field inventory going into the new year. We expect OEMs to remain cautious entering the first quarter of 2024 as they assess consumer sentiment at early‐season boat shows and monitor the macro environment. Our Engine Parts and Accessories business demonstrated steady performance in the quarter, reflecting a continued improving sequential trend.

Sales in the Products portion of the business were up versus prior year for the second consecutive quarter and our Distribution business was only down slightly, with sequential improvement from the previous quarter. Overall segment sales were up 22% on a full year basis versus 2019. Navico Group had a solid finish to the year, as an increased flow of new products and continued focus on cost control, business integration and complexity reduction helped offset a softer marine OEM market in the quarter and the considerably slower RV manufacturing environment. Finally, our boat business delivered sales and earnings in the quarter consistent with expectations, while continuing to ensure healthy pipeline inventory levels entering 2024. Strong demand for premium products, together with market share gains in many categories, is helping to provide a stable baseline for 2024.

Freedom Boat Club continues to grow and now has more than 410 locations. Members completed approximately 600 thousand trips in 2023, demonstrating the productivity of the model. Shifting to external factors now, U.S. employment remains at healthy levels with inflation continuing to stabilize. The cadence of Fed and global central bank interest rate reductions will continue to be an important factor in the coming months. Overall boat retail sales are trending slightly above 2023, but unit sales in the month of January are always a small contribution to the year. Global early‐season boat shows are generally encouraging, with good traffic, interested buyers and healthy lead generation. Normalized inventory levels are allowing consumers to shop for the models of their choice and incentives continue to be important in stimulating interest and assisting dealers in closing sales.

Our boat, engine and technology brands continue to perform well, with Mercury recording outboard share gains at the important Dusseldorf boat show, achieving overall share of 48%. Dealers entered 2024 with healthy inventory and are cautious in their ordering entering the new year as they closely monitor boat shows and retail at the start of the season, as well as the economic trajectory. We are pleased with interest in the recently launched Brunswick Retail Finance program with more than 25% of Brunswick boat dealers having already enrolled. The program provides an additional way to stimulate demand and convert leads, with an efficient online consumer finance approval process and the ability to introduce promotional financing. In addition, our investments in digital platforms continue to drive benefits across our brands with more than a third of Boat Group’s sales digitally assisted in 2023.

As expected, boat OEMs are carefully controlling boat production rates to align with anticipated retail in 2024, resulting in lower order rates for Mercury engines and Navico Group OEM products. The softness continues to be more prevalent in value products and low‐to-mid horsepower outboard engines, with premium product production and demand remaining more solid. Shifting now to a global view of revenue in the quarter, overall, we saw a 15% sales decline on a constant currency basis, excluding acquisitions. On a full year basis, the U.S. market declined mid‐single digits versus 2022, roughly in line with Europe and Asia‐Pacific. U.S. new boat industry retail was slightly down in the fourth quarter versus 2022, with preliminary full year retail in line with expectations of down approximately 6% versus 2022.

Overall, for the full year, Brunswick performed slightly better than the industry, picking up share particularly through strong performance by our pontoon, premium fiberglass and tow brands, supported by planned promotions and marketing on select product lines. Outboard engine industry retail units turned positive this period with the fourth quarter up 1% versus prior year, bringing full year unit retail to down 2%. Mercury continues to outperform the industry with fourth quarter share gains of 50 basis points in greater than 30 horsepower categories. As we actively manage boat pipelines, we ended with inventory in line with expectations and historical norms with U.S. weeks on hand at 36.7 weeks and 14,000 units versus 16,000 units in 2019.

International boat pipelines are slightly higher, which is normally the case. I will now turn the call over to Ryan to provide additional comments on our financial performance and outlook.

Ryan Gwillim: Thanks Dave, and good morning, everyone. Brunswick delivered a solid fourth quarter despite softer wholesale demand across our businesses. When compared to an extremely strong fourth quarter of 2022, net sales in the quarter were down 14% and adjusted EPS of $1.45 decreased 27%. However, we delivered a record Q4 free cash flow of $242 million, a 25% increase over prior year, as we continue to focus the enterprise on generating cash and minimizing working capital usage. Sales were below prior year as the impact of cautious wholesale ordering patterns by dealers, OEMs and retailers, coupled with higher discounts in select segments, was only partially offset by successful new product momentum, positive mix and pricing implemented in previous quarters.

Operating earnings and margin declined versus a record fourth quarter 2022 resulting from the impact of lower net sales and prudent spending on growth initiatives, partially offset by ongoing cost containment efforts. For the full year, we delivered the second highest sales and adjusted EPS in Brunswick’s history, just behind our 2022 performance. Our strong free cash flow of $473 million, resulting in second half free cash flow conversion of 143%, again reflecting our continued focus on driving cash in this challenging market. Now we’ll look at each reporting segment, starting with our Propulsion business. Revenue was down 12% versus the fourth quarter of 2022 primarily due to cautious OEM ordering patterns, partially offset by continued market share gains in outboard engines and the acquisition of Fliteboard completed earlier in the year.

Operating margins increased by 110 basis points versus Q4 2022 as the impact of the sales declines and higher labor inflation costs were more than offset by cost control and reduced material inflation. As Dave mentioned earlier, as we exit 2023 and enter 2024, we anticipate that we will continue to maintain our progressive market share gains, but that our propulsion business will be impacted by additional reductions in boat OEM production levels that may not abate until the start of the primary retail selling season in 2024. This will enable us to sell more engines into the dealer channel, but the overall impact will still be a decrease in overall market demand for engines. The Engine Parts and Accessories business continued to improve sequentially throughout the year, with Q4 sales essentially flat versus 2022.

The high margin Products business grew sales by 3% versus prior year, while Distribution sales were down 4%, as trends have continued to improve in both businesses from early 2023. Segment operating earnings and margins decreased in the quarter with the slight net sales decline and higher manufacturing costs more than offsetting the impact of pricing and lower operating expenses versus prior year. Navico Group reported a 17% decrease in sales as the business experienced softer marine OEM orders and the continued weak RV manufacturing environment in the quarter. Segment operating margins decreased in the quarter primarily as a result of the net sales declines, which more than offset the benefit of lower operating expenses. Despite an overall challenging 2023, Navico continues to make strides against its strategic priorities, including removing almost $20 million of structural cost, while improving its product development process and continuing to invest in market leading technologies and expand its customer base for integrated and connected solutions.

Finally, our boat business delivered sales and earnings in the quarter consistent with expectations, while continuing to ensure healthy pipeline inventory levels as we enter 2024. Sales were down 22% versus Q4 2022, but sales in our more premium Saltwater Fish segment, which includes Boston Whaler, grew 5% year‐over‐year. Adjusted operating margins and earnings were down primarily due to the lower sales, partially offset by focused cost reduction activities. Freedom Boat Club, which is included in Business Acceleration, had another solid quarter, contributing approximately 8% of the boat segment’s revenue during the quarter while seeing very steady membership levels despite the macro‐economic uncertainty. We successfully executed our capital strategy in 2023, ending the year with $480 million of cash, while funding strategic growth in our businesses and returning capital to shareholders.

We deployed $289 million for capital expenditures on exciting new products and growth projects across our businesses, which we believe will drive future revenue and earnings growth. In addition, as Dave mentioned, we took advantage of market and Brunswick share value dislocation, repurchasing $275 million of our shares, representing approximately 3.5 million shares or 5% of the company. We also increased our dividend for the 11th consecutive year. Finally, our investment grade credit rating remains strong, reflecting a healthy balance sheet and net leverage of 1.8 times. We will refinance our 2024 notes during the first‐half of this year, with our strong liquidity and cash flow generation capabilities continuing to provide investment and spending flexibility across the enterprise.

2024 has the potential to be a year of steadily easing financial conditions and while we enter the year with a cautious outlook, particularly on the first quarter, we remain extremely focused on driving earnings, while delivering steady free cash flow and resilient EPS, which we believe will result in continued strong shareholder returns. Our disciplined pipeline management, strong operational performance and continued investments in new products and growth, coupled with prudent cost containment actions and a thoughtful capital strategy, provide the necessary controllable levers in this uncertain consumer and business environment. For fiscal 2024, we anticipate revenue of between $6 billion and $6.2 billion, adjusted operating margins of between 12% and 13%, and adjusted EPS in the range of $7 to $8.

We continue to see positive free cash flow conversion and working capital trends, and anticipate generating more than $350 million of free cash flow for the year. Please see the appendix for additional guidance regarding anticipated segment metrics. We thought it would also be useful to provide a short walk from our 2023 adjusted EPS to our 2024 guidance, along with providing more insight on our planned 2024 OpEx. The main driver of the 2024 EPS reduction is the absence of pipeline fill across all our business units, as our channel inventory levels are fresh and at appropriate levels to start the season. A little more than half of the impact relates to our Propulsion business, as they continued to fill OEM and dealer pipelines well into 2023, with the remainder split evenly between our Boat Group and Navico.

If retail demand exceeds our expectations, we anticipate that dealers and retailers will reorder product more consistent with historical patterns, which would provide a potential benefit later in 2024 or into 2025. We then have approximately $0.50 of impact from increased tariffs, interest expense and a slightly higher tax rate. Although these three items are primarily uncontrollable, we will do our best to mitigate and minimize these expenses as we move throughout the year. Lastly, we will continue to take actions to right‐size our enterprise cost structure. Although OpEx will increase slightly year‐over‐year, the increase is primarily related to the Fliteboard and Freedom Boat Club acquisitions from 2023, together with normal cost inflation and resetting variable compensation back to target levels.

We are countering these items by planning to remove no less than $40 million of structural costs across the enterprise. Countering these headwinds are several tailwinds, mostly within our control. We anticipate continuing to take market share in outboard engines, especially in high horsepower categories, while also taking share in premium boat categories and certain marine electronic categories where new products will drive growth. We also plan to be aggressive with share repurchases, especially early in the year. I will wrap up the financial update by sharing some P&L, cash flow and other capital strategy assumptions for the year. First, we expect a modest working capital usage for the year, reflecting our continued enterprise goal of lowering inventory levels to match anticipated sales while generating cash.

Our slightly higher depreciation versus prior year reflects the additional capital invested in our businesses in recent years, with acquisition amortization, which we exclude from our adjusted results, being similar to prior year. It’s been a few years since we’ve had to discuss tariffs, but despite a favorable exemption extension into the spring, we anticipate paying $15 million more tariffs versus 2023. These tariffs are primarily related to components sourced from China used in our primary outboard manufacturing facility in Fond du Lac, Wisconsin, along with the importation of 40 to 60 horsepower engines produced at our Suzhou, China assembly plant. Lastly, our tax department does an outstanding job of prudently and appropriately minimizing our tax footprint and we anticipate a 23% effective tax rate on adjusted earnings for 2024, which is slightly higher than 2023.

And finally, this page shows several capital strategy and other financial assumptions as we begin the year. On capital strategy, we anticipate being very active with share repurchases as I just mentioned. And to support this effort, earlier this week, our Board of Directors approved a fresh share repurchase authorization of $500 million, which we plan to put to good use. We will have a higher net interest expense in 2024 resulting from the eventual refinancing of the 2024 notes, but are also planning $100 million of debt reduction to minimize the impact. We also anticipate increasing our dividend in February for the 12th straight year. On FX, we currently think that rates will have a neutral to slightly negative impact on full year earnings, but this can obviously swing either way, predominantly on the strength of the U.S. dollar versus the euro and a few other currencies used by our global businesses.

Finally, you’ll notice a reduction in planned CapEx for the year. Although we plan to continue funding many projects and investments in products and technology for future growth, we are in harvest phase of many of our larger projects in recent years and plan to be able to scale back spending slightly without sacrificing any future growth plans. I will now pass the call back over to Dave for concluding remarks.

Dave Foulkes: Thanks, Ryan. With field inventory at normalized levels and consumers having their choice of products, it is vital that Brunswick continues to differentiate through a rapid flow of exciting new products and technology, and in just the first few weeks of 2024, Brunswick launched over 15 new products across its brands and businesses. In January, we again participated in the Consumer Electronics Show where we launched two higher horsepower models in the Mercury Marine Avator electric outboard line up, which now contains five models in total. Demand for Avator remains solid, with nearly 60% of shipments in 2023 going to Europe. Sea Ray introduced the new SDX 270 and 270 Surf models with next‐generation features, styling and comfort.

The SDX Surf is the first model in the SDX line to feature the Mercury Bravo Four S forward‐facing drive and an intuitive wake surfing control system designed jointly by Mercury Marine and Navico Group. Brunswick’s Princecraft, Harris and Lowe brands also introduced multiple new products at early season shows, featuring Mercury Marine and Navico Group technology. We are also very excited about the new, segment leading Simrad NSX Ultrawide, the industry’s first full functionality high definition, multi‐function display, which features a 16 by 9 screen aspect ratio and showcases the seamless interface of the latest Simrad Android operating system. And finally, Freedom Boat Club continues to grow organically and through acquisition, including though the acquisitions of its Savannah and Hilton Head franchise territories in late 2023 and two new franchise locations in Spain already announced in 2024.

Before we conclude, I am thrilled to highlight the exceptional accomplishments of our teams from across the enterprise that were recognized with a record high number of awards in 2023 and continue to be recognized in early 2024. We wrapped 2023 with 115 major awards for our products, technology, people and culture. And just in early 2024, the new Harris 250 Crowne won the NMMA Innovation Award at the Minneapolis Boat Show, the new Sea Ray 260 SLX won European Powerboat of Year and the Veer V13 won Boating Magazine Boat of the Year in its category. In addition, Brunswick’s products and teams are nominated for multiple awards at the upcoming Miami Boat Show. Thank you again to all our talented Brunswick employees who make these prestigious awards possible.

Which leads me to remind you to join us at our Investor and Analyst Event on February 15, 2024, at the Miami International Boat Show, where we look forward to hosting you to see the latest products and technologies from across our brands and businesses, as well as meet with members of our management team. Thank you for joining the call. That concludes our prepared remarks. We will now open the line for questions.

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Q&A Session

Operator: Thank you. [Operator Instructions] Our first question is from Matthew Boss with JPMorgan. Please proceed.

Matthew Boss: Thanks. So, Dave, maybe could you help rank the topline drivers by segment and just visibility today to improvement as the year progresses? If we could just bridge the delta between the more than 20% decline expected in the first quarter to the full year guide of down mid-single digits, I think, that would be really helpful?

Dave Foulkes: Yeah. Hi, Matthew. Yeah. The — I think the fact is really similar across all of our businesses to some extent and it’s really the fact that, we saw in particularly the December of the fourth quarter reduced demand from marine OEMs and more production shutdowns, which had an impact on our Mercury wholesale orders and Navico Group wholesale orders, as well as of course, we reduced production to meet our year-end targets for boat inventory and get to that 37 fish weeks on hand. So the fourth — the first quarter we anticipate continued cautious ordering across wholesale by Mercury’s OEM customers, which is about kind of 80% of their sales and Navico Group’s OEM customer — marine customers, which is about 30% of their sales, and we obviously will be continuing to be to meet our own boat production during that period.

What we anticipate based on early season retail, confirmed I think by early season retail now, is that orders will begin to pick up to more normalized levels as we enter the main selling season. In Q1, as we get to the end of Q1, we’re seeing new boat retail going to bump about 10% versus last year, which is an encouraging sign. So I would say that the factors really affect all of our divisions somewhat similarly and it is the production and wholesale ordering getting back to more normalized levels for Q2 forward.

Ryan Gwillim: And Matthew, good morning. It’s Ryan. Just a reminder, Q1 of 2023, we were very much still filling pipelines in just about all engine categories and even boats, if you remember. So it is a more challenging comparison. And I would — if you’re modeling it out, the first quarter of 2024 should look relatively similar to the fourth quarter of 2023, as Dave mentioned.

Matthew Boss: Great. And then maybe just to follow up, Ryan, as we consider the, I think, it’s roughly 12% operating margin at the lower end of this year’s guide as maybe a potential floor. Could you just elaborate on the $40 million structural cost savings that you cited in your remarks, where in the organization that you found efficiencies and are there further opportunities that you see for potentially additional savings?

Ryan Gwillim: Yeah. Matthew, I mean, it is — this is a cross enterprise project that we’re undertaking. And frankly, it’s just to right size the overall cost structure of the enterprise. If you think about where our strategic plan and our targets are, we’re still very confident in those. But getting there to 2027 is going to take a little bit, the shape of that is kind of unfolding as we’d expect, which is 2024 being a little bit more muted and then picking back up in the out years. We just need to make sure that our cost structure matches that same shape.

Dave Foulkes: Those actions are in flight actions.

Ryan Gwillim: Yeah.

Dave Foulkes: If we need to find more, we always find a way.

Ryan Gwillim: That’s right.

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

James Hardiman: Hey. Good morning. Thanks for taking my call. So I want to talk about inventory. You guys have said that you feel pretty good about where you sit today. Seems like a lot of other players in the industry are speaking to inventories being too high. I guess, what do you think the difference is there? Do you think you’ve controlled your own inventories better than maybe some other OEMs? It doesn’t matter if that’s the case, if you’re ultimately competing with those that haven’t, and I guess, how do we think about inventory to finish 2024, whether in terms of units or weeks on hand?

Dave Foulkes: Yeah. Hi, James. Thank you for the question. Yeah. We did see a lot of commentary about other OEMs noting higher than design inventory levels. We are very comfortable with our inventory levels. I think we explained that we had put a lot of effort into managing inventory in the back half of the year. We did see some relatively abrupt changes in production patterns in December from some of Mercury’s OEM customers. Our production did not change as abruptly because we began to, I think, be tricked down somewhat earlier. And yeah, honestly, despite the commentary, yeah, we feel extremely good about our inventory levels. Does it matter what the industry does? Well, it makes it more difficult for us to predict Mercury and Navico Group wholesale sales, because we tend to experience more choppy ordering patterns in the back half of Q4 and we may be the same in the first half of Q1.

But I feel like based on our retail performance in January, which you know is a very small month, but still somewhat encouraging, I don’t think we’re suffering. I think we have the right level of retail incentives, dealer incentives to stimulate demand and I think we have the right inventory levels. So I’m very comfortable where we are.

Ryan Gwillim: And then the last part of your question was, how do you think you’ll end 2024? Well, the plan is to have inventory levels below 2023 end of year levels by the end of this year. Not dramatically, but down a handful of weeks on hand. If retail continues to be a little bit outpacing maybe our expectations, then we can maneuver that a little bit. But right now, the plan would be a few weeks on hand lower at the end of 2024 than 2023.

James Hardiman: Got it. Really helpful. And then as we sort of contemplate this 2024 guidance, it sits somewhere between when you gave us the recession scenarios, sort of the modest and the severe recession, despite not being in a recession and I don’t point that out to sort of knock your projections two years ago. But I guess maybe speak to what the divergence is, I guess, as it occurs to me, back then we weren’t necessarily thinking that the macro weakness would be as interest rate driven as it appears to have been. Maybe speak to that. And I guess what I’m really trying to figure out is, if rates in fact do come down starting this year, is there an opportunity for a snapback maybe more quickly than we would otherwise see in previous sort of post-recession scenarios?