Brunswick Corporation

Good morning and welcome to Brunswick Corporation's second quarter 2020 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 Brent Dahl, Vice President.

Good morning and thank you for joining us. With me on the call this morning are Dave Falks, Brunswick CEO and Ryan Willems, 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 FCC filings and today's press release. All these documents are available on our website, 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 consolidated financial statements accompanying today's results. I will now turn the call over to Dave.

Thanks, Brandon. Good morning, everyone. Our second quarter performance again demonstrated the power of our marine-focused portfolio, despite the unprecedented disruption to the global economy resulting from the COVID-19 pandemic. Our operations and supply chain teams did a wonderful job of quickly and safely restarting and ramping up our global production facilities while rigorously applying our COVID-19 health and safety protocols. We continue to enhance these protocols to keep our 13,000 global employees safe, and I want to thank them all for their hard work, sacrifice, and vigilance during this challenging time. All our businesses outperformed our expectations in the quarter. Our resilient, aftermarket-driven parts and accessories business stayed strong and supported consumers as stay-at-home restrictions were lifted and voters returned to the water in force. Demand in the U.S. retail marine market accelerated into May and June, resulting in robust new boat and engine sales, with sales to first-time purchasers or returning last boaters representing approximately half of new boat sales. This surge in demand, together with the suspension of production in most of our 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 in dealer inventory versus the second quarter of 2019. This strengthening demand, combined with market share gains, especially in Mercury's higher horsepower output engine lineup, resulted in stronger top-line earnings and cash flow performance than anticipated, with the businesses deleveraging consistent with our expectations shared on the first quarter call. Uncertainty in the global economy remains as a result of the unpredictable trajectory of the pandemic, and we will continue to focus on controlling costs through structural cost reduction actions while remaining flexible with our capital strategy to enable investments in new products and technology. The COVID-19 pandemic materially impacted our global business operations in the quarter, We temporarily suspended manufacturing of most of our engine and boat facilities late in the first quarter as states implemented stay-at-home restrictions. On April 13, we resumed operations at Mercury's facility in Fond du Lac and at Boston Whaler and opened the remainder of our facilities over the following weeks. As of today, all our global manufacturing and distribution facilities are online with a continued focus on rigorously applying, evolving, and automating our COVID-19 mitigation procedures, including temperature screening, distancing, PPE, and cleaning protocols. Approximately half of our dealer network was closed in some capacity in April, but the network was fully operational by mid-May. Enabled by our distribution business, which continued to operate throughout the pandemic, our dealers have been extremely busy selling products and getting voters out on the water. As travel, sports, camps, and other traditional summer activities have been restricted by the pandemic, boating usage has increased as people look to recreate outside in a social distancing environment. Freedom Boat 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. However, once stores reopened, several locations had many of their busiest weekends in history. with strong membership increases across the network. Finally, despite focusing on issues related to COVID-19, we've also maintained momentum and investment in new product programs and have accelerated our digital initiatives. Progressing these programs and initiatives is critical in enabling Brunswick to continue to differentiate itself as the clear leader in the recreational marine industry. I'll now provide some highlights on our segments in the overall marine market. The propulsion segment continued its strong performance despite closing its primary manufacturing facility several weeks early in the quarter, then having to ramp up production upon reopening. The results were positively affected by healthy inventory levels entering the quarter, which allowed sales to continue during the shutdown period, with sales primarily made to dealer and international channels during that period. Similar to the bulk business, Mercury's pipeline inventory of outboard engines is significantly lower than past years, requiring production increases in the back half of the year and into 2021 and potentially beyond to refill pipelines and meet demand. Mercury continues to gain outboard engine market share, especially in higher horsepower categories, where we have focused significant investment in new products and capacity in recent years. Due to our strong product lineup, Mercury has been successful in converting OEMs to its products, with a number of additional conversions in process. A significant recent OEM win was the partnership with BRP announced in May, where Mercury became the global output engine supplier of choice for BRP's U.S.-based boat brands, Alumacraft and Manitou, and became the exclusive package supplier for its Australian Tellwater brand. Subsequent to the May announcement, Mercury also signed an agreement with Scandinavian-based Friedenbo to become the preferred engine partner of the company's boat brands, Sting and Nordkamp, in all global markets. Mercury's aggressive new product development cadence remains on track with significant new product launches over the next year. For our P&A segment, second quarter results were bolstered by our distribution business as very healthy boat usage commenced once stay-at-home restrictions were lifted. Our distribution business remained open throughout the pandemic, supplying products to support our dealers as they attempted to quickly get boats prepped and on the water for summer, along with supplying essential businesses with critical products as they fought the coronavirus. The aftermarket portion of our P&A business had a steady quarter with accelerating demand in May and June. The smaller OEM portion of the business had a slower start to the quarter as both builders were closed due to the pandemic. However, sales progressively increased through the quarter as customers came back online and retail demand strengthened. Including power products, our P&A business represented almost 40% of the company's 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 significantly exceeded 2019 levels. The bull segment remained profitable in the quarter, despite significantly lower volume in April due to the production shutdowns. The business delivered at a very respectable 25%, even with shutdown-related 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 of the second quarter since the early 2000s. Boston Whaler and C-Ray have seen very strong retail sales, and their dealer inventories are especially low, and our value brands have also performed well at retail and will also require significant pipeline replenishment. We are hiring additional workers at most facilities to ramp up production, but it will be well into 2021 or potentially later before pipelines are normalized. Freedom Boat Club continues to exceed our growth expectations. Freedom recently opened its 235th location and now has 33,000 memberships company-wide, with over 4,600 new memberships added in the quarter alone. Each membership often has multiple members who can enjoy the membership advantages, resulting in an increased install base for future voters and more P&A generation through increased vote usage. There are now more than 3,000 votes 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, our focus on digital technologies is enabling us to reach and engage with a wider audience of potential new boaters. 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%, while international sales remained steady and were down only 3%. International markets remained relatively resilient in the quarter as certain countries restored more normal business conditions earlier than the U.S., Asia remained a bright spot with strong demand for higher hotspot outboards, generally for commercial purposes, and steady P&A sales. Finally, although not fully reflected in the revenue figures on this slide, our Canadian businesses have seen a measurable uptick in retail growth since mid-June, with the positive momentum carrying into July retail sales. This table provides some color on the performance of the U.S. marine retail market. The second quarter has historically been the largest retail quarter, comprising almost 45% of the total sales volume for the year. As you can see, retail improved 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. Made sales improve as states reopened, and 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 were to first-time boat purchases, which outpaced the industry by a considerable margin. Overall, retail volume for the main powerboat segments was down 8% versus Q2 of 2019, according to FSI reporting to date. Note that there is likely a significant amount of lag time in the reporting, as our own internal registration data shows June year-to-date retail growth for Brunswick brands, while FSI still shows us down 5%. 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 our Blue 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 on our financial performance. Thanks, Dave, and good morning, everyone.

As already discussed, the COVID-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 of 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 increased was offset by mark-to-market adjustments related to our non-qualified 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 delivered 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 COVID-19 pandemic. Operating margins and operating earnings were down in the quarter as benefits from cost reduction activities were 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's first half 2020 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 increased. In our resilient 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 stay-at-home restrictions, which disrupted dealer, retail, and OEM operations in many locations in the first half of the quarter, and offset recent cost reduction actions. The Advanced Systems Group was more affected by boat builder closures than the rest of the segment, as ASG has a higher percentage of sales to OEM customers than the engine P&A or distribution businesses. Overall, This is a very strong quarter for the P&A segment, and it's further proof that our focus on growing the parts and accessories portfolio through both organic initiatives and through acquisitions continues to be a 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 in most plants in April and the associated ramp of 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 boat room 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 2020 second quarter performance, and the business was not profitable in any of those quarters. Many of our brands had outstanding retail performance in the quarters. Boston Whaler and CRA outperformed their categories. Lund continues to be the leader in premium 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, but 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 pipelines ended the quarter at historically low levels, our lowest mid-season pipeline levels in almost 20 years. Dealer pipelines ended the second quarter with 23 weeks of boats on hand, measured on a trailing 12-month basis. With units in the field, lower by 34% versus second quarter 2019. We are ramping up production in 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 strength in July, inventory levels will 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 the demand environment and operating results for the remainder of 2020 still involves 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 will ultimately influence the performance of the marine market and the health of the global consumer. In response, Our businesses continue 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 percent for the year, with stronger demand in the U.S. than in 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 of between $560 and $575 million for the year, which represents an approximate 10% decrease from our 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 that the level of recovery of the global economy, normalized general 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 2020 revenue and operating earnings to exceed second half 2019, as our parts and accessories business should remain steady and our propulsion of boat businesses will ramp up production to meet demand and refill pipelines. We'll believe that full-year free cash flow generation will be in excess of $325 million, which I'll discuss in more detail in a few slides. I would now like to provide an update on our operating leverage assumptions. Our operating leverage 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 COVID-19-related costs. The leverage in the propulsion and P&A segments was also affected by unfavorable changes in foreign exchange rates 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 20%, 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 in the past 12 months will continue to provide benefits. COVID-19-related costs will still be a headwind as our businesses work 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 and remains an area of great focus. Our 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 of 2019, principally related to significantly less working capital usage driven primarily by decreases in inventory levels. Our free cash flow projection for the remainder of the year assumes favorable working capital trends and positive earnings. As a reminder, the level of borrowing capacity under our revolving credit facility is tied to both a leverage test and an 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 P&L 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 have 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 of the year, and although we anticipate modest inventory build in the back half of the year in our propulsion and T&A 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, with a cash tax rate anticipated to be in the low double-digit percent. Our average shares outstanding figure remains at approximately 80 million shares. Likewise, the capital strategy assumptions shown on this slide have not materially changed aside from our estimate on debt retirement in the year. We are 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 $0.24 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 throughout 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 will now turn the call back over to Dave to continue our outlook on this. Thanks, Ryan.

Although it's been a challenging first half of the year, our businesses are executing extremely well against our operating and strategic priorities. In the propulsion segment, we continue to leverage the strongest product lineup in the industry to gain market share in the parts of the market where we've been historically underrepresented. Our further growth into saltwater, repower, and international commercial markets is being enabled by the capacity added last year and will be bolstered by further investment in 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 P&A segment, we anticipate favorable boat usage trends to continue as people look to remain active outdoors in a socially distancing setting. Additional hours on the water drive the need for consumables and replacement parts, which are delivered same day or next day to thousands of points of sale across the globe through our distribution network. We also expect Power Products to have a solid second hand as it expands its systems integration business, which provides both OEMs with complete and bespoke system solutions for their boat models. In our boat segment, we will continue to focus on launching new products across the portfolio, including some new products designed for younger boaters, rapid production to meet demand and refill pipelines, and returning to our stated plan to improve operating margins. We anticipate back-camp operating margins in the high single digits as additional volume benefits and cost initiatives should drive improved margin performance. Freedom Boat Club continues to expand and execute against its strategic growth strategy. We have added 25 locations thus far in 2020, bringing the number of locations to 235, and we continue to increase the share of 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 our ACEs strategy forward. These initiatives will drive deeper, more seamless consumer engagement and enable future growth. Again, I would like to thank Brunswick's 13,000 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 plan financial targets remain in reach. In closing, while we remain very cognizant of potential future macroeconomic headwinds and other uncertainties, our resilient second quarter performance together with a surging marine retail environment has created substantial growth opportunities for the remainder of 2020 and 2021. Given recent sustained demand, Elevated production levels over time will be required to rebuild pipelines, and together with substantial upcoming new product offerings, should drive wholesale growth through 2021 and potentially beyond. Our focus on structural cost containment, along with our strong financial profile and healthy balance sheet and real liquidity, enables us to invest in our businesses consistent with our standing objective of driving shareholder value, while ensuring that we continue to prioritize and devote our best efforts to protecting the health and welfare of our employees in the COVID-19 environment. Earlier this week, Brunswick was named the Forbes list of America's best employers for women. From the thousands of companies that were considered for this honor, only 300 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 comes shortly after Brunswick was named by Forbes to its list of the best employers for diversity earlier this year, and in 2018 and 2019 being named among America's best employers. These awards reinforce our dedication and commitment to equal opportunity, inclusion, and diversity across our entire global workforce. and we will continue to prioritize thoughtful actions to accelerate our progress. We all recognize that we're operating in 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 and the Brunswick team, I would like to again send continued heartfelt best wishes to those most affected by COVID-19. including those fighting and recovering from infection, and the first responders, health care workers, and essential employees on the front lines. Brunswick will continue to do our part in helping our communities persevere through and ultimately recover from this crisis. I'll now open the line for questions.

Thank you. To ask a question, you'll need to press star 1 on your telephone. To withdraw your question, press the pound key. Again, if you would like to ask a question, press the star, then the one key on your touchtone telephone. Our first question comes from James Hardiman with Wedbush Securities. Your line is open.

Hey, good morning. Thanks for taking my call. Obviously, these are unusual times, so I wanted to make sure I adequately understood some of the Some of the numbers you've given us here, I guess let's start with June. I think you said June was a record month for most of your brands. I just want to make sure I understand that. 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 used to be twice as big as it is today. or more at times, and some of these brands go back a long time. What's the history that you're looking at when you're saying that June was a record month?

Hi, James.

This is Ryan.

Yeah, you're on to it. It's meant to be that June was, in terms of units at retail, a record for many of our brands, all the way back to really the GFC. Obviously, when the industry was 300,000 or 400,000 units, a completely different scale. It's certainly a record in the last 15 years since post-GFC.

Got it. Okay. Just wanted to make sure. And then as I try to bridge the gap between what the SSI is saying is, I guess call it a 7% year-to-date decline for the industry, and what you guys are saying will be low single-digit growth for the year, I guess if I take the SSI numbers at face value, we would need double-digit growth in the back half of the year. obviously the SSI numbers aren't the most reliable thing in the world. But knowing that you guys typically build some conservatism into forward-looking assumption, how should I think about that? Is that more a statement of, you know, the SSI 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 from a retail perspective?

Hi, James. It's Stacey. Both, I think, is the answer. Our internal registration data is significantly ahead of SSI. Obviously, it's our brands, and I believe that our brands have performed very strongly, but I think we also believe that there will be some future revisions to SSI 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 of the selling season, but July is very strong.

Okay. And then I guess last question, what do you think your business could do in terms of boat retail for the year? And I guess if I just take a step back, you know, retail for the industry is now expected to be at or better than it was you know, when you originally projected it at the beginning of the year, your free cash flow numbers are back to where they were, although on lower CapEx, I believe. OpEx better than you thought. I guess, is it possible for you to get back to the original earnings guidance for the year?

I think Ryan can help me a bit here. You know, I think, you know, 2019 is possibly in reach. The 2020, I don't know if we could produce enough in the back half of the year 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.

Yeah, Dave, I would say that's right. And, James, something to think about. I mean, the absorption impact and some of the costs that we incurred in the quarter, having the production temporarily suspended and then having to ramp up in all of our facilities, Aside from P&A, I mean, some of that is just going to be very difficult to kind of claw back and jump over to get to the original guidance.

Got it. And the retail, is there a way to think about how you guys are projecting your own retail for the year? I think we believe that we will be at or exceed the industry.

Yeah, I think, I mean, early indicators for us are very strong market performance for the brand them. 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 boaters. And I think we own, as you know, James, three of the four most recognized brands in the industry. And if you think about where a new boater might go, I think they would go to these kind of recognized brands. And we're seeing the benefit of owning those strong brands now. Makes a lot of sense. Thanks, guys.

Thank you. Our next question comes from Randy Connick with Jefferies. Your line is open.

Yeah, thanks a lot. I guess maybe a question for Ryan here. You know, in the press release talk about, you know, having to slightly take up your expense estimate for the year, obviously to kind of help with the higher demand function. But, you know, it's only slightly higher. So can you kind of elaborate a little bit more on the efficiencies you're kind of gaining in the business around, you know, the ability to take those expense reductions, and then kind of give us some perspective on, you know, how we can think about those continuing into the medium term over the next few years, assuming that we could potentially have a, you know, more robust multi-year demand environment, you know, that those costs can be kind of contained to give you, you know, margin expansion. So maybe elaborate a little bit for us on these different efficiencies you're finding and going after in the business?

Well, I guess this question for Ryan. Maybe I'll jump in and take the first part. So you know about the cost reduction, structural cost reduction actions that we implemented in 2019 with a flow through to 2020 that included a significant reduction in staffing levels throughout the entire organization and a number of organizational initiatives that consolidated particularly in the bulk group, but really across a number of broader portion of the enterprise as well. I just want to give you an example here of how we try 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 in Greenville that was supplying our C-ray boat plant in Tennessee and also in Florida. We have enough space in those two facilities to accommodate what was previously in Greenville, which is a leased plant. And we executed that and completed it 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 stakes in the ground and make sure that those cost reduction actions that we take are not just austerity. They, in fact, do fundamentally reduce our structural costs. Ryan?

Yeah, no, Dave, that's all correct. I would also just add, Randy, you know, we are still operating kind of at 10%. below our plan for the year in terms of OPEX. And a lot of that is just day-to-day efficiency in the plant, the plant and facilities, people having projects to take costs out of everyday manufacturing processes. And so that will continue. I think to your next point about what it may look like in 2021 and beyond, obviously we would have compensation, some other things, back to 100% levels and some inflation would come back in. But that $50 million that Dave discussed that we took out during the initiative, that should stay out. And even if we bring some cost back into the business, It would be all on growth initiatives.

Yeah, super helpful. So that bodes well, obviously, for margins potentially. So, you know, then I just want to finally ask about the demand side equation then. Let's try to get a little bit more perspective there. You comment, you know, in the release again and on the call about the talking to first-time purchasers of boats, or returning last voters coming back into the fold. Maybe, you know, elaborate a little bit more on that. Anything you're seeing that gives you really interesting data points that you could share with us around sign-ups around the Freedom Vote business, a vote club business as it relates to demographics, anything that you're getting out of your dealer network that would give us some additional perspective. What I'm trying to get at here is to try to think through, you know, the – the demand environment potentially changing or shifting more towards voting on a multi-year basis, a more permanent, semi-permanent basis to give, you know, people in the market more conviction of, you know, a lengthened demand cycle that you combine that with these good cost savings that are more permanent in nature that can lead to a really robust story, not just for the 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 boaters or people buying boats recently were either new boaters or returning last boaters, that's over a period that extends through to earlier in the year. That shift has continued to evolve over the last few months. So If you think about it, if you're a new voter, it's not a decision that you probably immediately come to. If you're a lapsed voter, you probably come to it more quickly. It's an obvious thing that you've done before and that you can re-engage with. There's more to think about if you're a new voter. We now do surveys every month to try and keep a closer track of that and also work with independent third parties who study that data. As I mentioned earlier, in June, for Brunswick Brands, 40% of sales were to new boaters. That's not new boaters plus lapsed boaters. That's just new boaters. And we were significantly ahead of the industry, many points ahead of the broader industry. Some of our value brands, particularly a brand like Bayliner, which may be an entry point for a new boater, in June, 60% of Bayliner's sales were to new boaters. So this is the breadth of our portfolio and the fact that we're able to offer both value and premium across the company with different boating styles, I think allows us to access Many of these new boaters, I think we're going to over-index because of the strength of the brand and the breadth of the portfolio. And we believe, obviously, there are a number of things to do to keep these boaters in boating once they buy. But I think one of the best indicators of people continuing in boating is having a great experience, whether that's through great new boats or through Freedom Boat Club. And we're providing those great experiences. Freedom certainly is benefiting hugely with massive membership growth, significantly beyond our expectations. In terms of demographics for Freedom, there are about twice as many women who are members of Freedom Boat Club than proportionally own boats. So we over-index on women. We also over-index on younger boaters in Freedom Boat 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 buses.

Thank you. And our next question comes from Scott Stember with CL King. Your line is open.

Good morning, guys, and thanks for taking my questions. Hey, Scott. Just talking about the new customers, I think you said 40% were new to your 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?

Yeah, we have no, there's no change in credit worthiness. So they're all very solid in terms of age. They're certainly trending younger, significantly younger, I would say. And also they tend to have larger families because they're a different life stage. So they're looking for Pontoons, runabouts, you know, boats for multi-purposes. And, yeah, this is new boaters, not just new to our brands. So, yeah, we have a lot of demographic trends that we can share on those boaters, 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 just talk about the fleet of boats, replacement, expansion, and how Brunswick will take advantage with, you know, Brunswick's brand as that expands?

Yeah, so we now are, I mentioned earlier, 3,000 boats in the fleet. The boats turn over about every two to three years, which means that now there are, something in the range of more than 1,000 boats every year that are coming up to be renewed by new boats. We are penetrating well ahead of our expectations in terms of new Brunswick boats. Sea Ray is particularly popular. Bayline is popular. Our pontoon brands are extremely popular. And Mercury Engines are penetrating even faster than Brunswick Boats because it's possible to convert non-Brunswick brands to Mercury Engines as well. So we are well ahead of our expectations and on an accelerating trend in terms of penetrating Freedom Boat Club with our brands. If you think about the fact that we've owned Freedom for just over a year now, which means that we've only had a relatively short period to both market and provide our brand. I would say we're doing extremely well and expect to continue to be beyond our expectations, original expectations.

Got it. And just one last quick one on boat shows. Obviously it seems like a lot of them are 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 a meaningful effect on our new product launch cycle. I think every industry is coming to terms with digital or kind of social media type launches of products in the absence of physical trade and boat shows in our case. We don't expect it to affect demand. As it turns out, the impact of the pandemic has effectively substituted any impact that boat shows might have had on kind of short-term demand. Last week we held a virtual boat show, which was extremely well attended. So the attendance of that show was like the attendance of a typical boat show. And we intend to evolve our capability there. We are assuming that at some point in 2021 we'll be able to reinstate physical boat shows, and there are a few on the calendar in 2020 that we're 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 launch new products.

Thank you. And our next question comes from Joe Altobello with Raymond James. Your line is open.

Thanks. Hey, guys. Good morning.

Hey, Joe.

First question, I was a little surprised that you talked about wholesale growth through 2021 and potentially beyond, given all the variables that go into that. So I guess my question is, how much will retail performance impact that? Or are channel inventories just so low at this point that you can get there just through replenishment allowance.

Yeah, Ryan, I'm still running. You know, even relatively normal demand, if you think about the fact that we're probably 12, 13 weeks behind where we should be, which is a quarter of a year's production. So, you know, our ability to add a quarter of a year's production on top of meeting demand is going to take us, well through 2021, even in 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, long-term rebuilding process.

Okay. As a follow-up to that, you did mention this morning that the 2022 targets that you laid out back in Miami are still in reach. I'm just curious, what has to happen both internally at Brunswick as well as externally from an industry standpoint for you guys to get there?

I'll ask Ryan to comment on this, but just broadly, I think the knowables would say that they're solidly in reach. It's the unknowables that's causing us to 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 remainder of it was in our hands and remains in our hands. And Ryan, I don't know if you want to comment on specific parts.

Yeah, I mean, Joe, if you remember, the 2022 plan was predicated on very slight market growth, call it flat to up one or two percent at the most, depending on the year. And what you're essentially seeing is a little bit of acceleration in 2020 against those targets, but also allowing us to have more wholesale sales in the back half of this year into 21 and into 22. And that is really offsetting some of the capital structure pieces that possibly really are delayed. For instance, Share repurchases, which were planned in the 2020 plan, are likely to be shy. M&A that was planned potentially delayed into the back half of this year and into 21 and 22. So there's just a little bit of delay in terms of EPS and 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, especially given the inventory situation, which obviously helped. Free cash flows in the quarter, you know, those have not materially changed. So it's really just the function of a little bit more market, allowing us to offset some of the planned capital strategy pieces that will be pushed out a little bit.

Got it. 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 Boat Club. So with the kind of 16% sequential increase in memberships, Q1 to Q2, can you give us a sense of what that was kind of on a fame store basis? And I guess what I'm trying to get at is if you're seeing a lot of demand coming in to these clubs and kind of the existing clubs, how are the clubs handling that in terms of limiting memberships, any sense of kind of wait lists for people that want to join kind of a backlog? You know, how much capacity do they have to add boats to their network? I know they're kind of space constrained. You know, I guess, you know, how are they getting on that? And then the second part of that question is kind of going back to the previous one on replenishment of the boats in Freedom Boat Club. Is that strictly on a time basis or is it on a usage basis? So if that usage ramps up, that replenishment can 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 Boat Club, I think we've explained before that we think that there are pretty much an order of magnitude more potential locations for Freedom Boat Club than exist right now in the U.S. And, of course, we're exploring international expansion as well. But in the short term, you'll notice 3,000 votes and 33,000 members. So we're trying to maintain that 10 to 1 ratio that we've described of members to votes. Certainly, at the moment, freedom is expanding pretty much There are several things that are kind of limiting the rate of expansion, if you like. Obviously, it's expanding fast, but one of the things is we insist new members have both classroom and on-water training, and conducting that training, there's a backlog conducting training. It takes a day to kind of get through that, including four hours or so in the water. We need people to train regularly. We need to make sure people are adequately equipped to go out on the water. And then certainly some locations have gone to, I would say, some less ordinary or extraordinary measures to acquire additional boats, including going to kind of local dealers as opposed to getting them a retail price versus getting them at a discounted price. Boat availability might affect them a bit, but I think they're in a pretty good position overall. So I would say there are, apart from a few logistical things, there are relatively few limitations on continued growth of freedom. And the trajectory is very, very strong. It's a network effect. The more locations there are, the more people know about them. I don't know if you've noticed, but It seems like every newspaper that I read or online story that I read has a Freedom Book Club story in it right now. It's one of the stories of the pandemic from my perspective. The more there are, the more people notice them, the more people want to join. But we are definitely clearly maintaining the standards that you'd expect of a premium franchise in terms of boat availability. The turnover of boats is typically two to three years. Boat usage in freedom is high anyway. So it isn't typically based on numbers of hours. It's just based on some considerations of the quality of the boat that the members expect and the value in the pre-owned marketplace. So I think that there might be an acceleration of but I think it's pretty steady now. It tends to be three years for fiberglass, I think, and two years for kind of pontoon.

Perfect. Thank you again for all those questions. Appreciate it. Congrats, guys.

Thank you. Our next question comes from Tim Condor with Wells Fargo Securities. Your line is open.

Gentlemen, again, congrats on a very volatile environment and to the whole organization. A couple things here. It's pretty clear that it's going to take through the majority of 21 and maybe even longer to get the channels, 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, are you or are you not seeing here as you ramp that back up? And then, Ryan, on FX, we've seen a pretty sharp sell-off 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 of the year, and in particular 2021. You want to take that first?

Yeah, a lot of that big VFX is pretty straightforward, Tim. Obviously, a bit of a benefit if some of the dollar weakens, especially against the euro. But there's some offsetting, obviously, against the Canadian dollar and others. But certainly, there is a little bit of a goodness in terms of outside the U.S. sales if the euro would strengthen. It doesn't really materially change our hedging program, but it does provide some goodness for international sales. What was the question again?

Labor. Oh, okay. So, yes, Tim, I would say that we're seeing some kind of on the margins at the moment evidence of supply chain needing to work hard 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 our 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 components and systems that we need. It's something that we monitor a lot, but it's not materially holding us back right now.

Are you seeing as you, for your own facilities, look to hire folks, are you seeing any challenges there at this point?

Well, we're holding, I mean, there are some logistical challenges because of COVID, so a lot of virtual job fairs and job fairs, physical job fairs where we maintain distancing and those kind of things. But recently, just two weeks ago, Boston Whaler held a job fair and actually was able to make hiring offers to about 150 people. So it takes quite a bit of work and preparation, but we are making considerable progress in accessing high-quality new labor. Obviously, when we do that, we go through a bit of a period when they're not as productive as would be an experienced worker, but that is a small price to pay, I think, for increasing capacity in the longer term. And we expect those kind of hiring opportunities issues to be behind us as we accelerate into the second half or more broadly into Q3. So really good progress. It isn't completely easy and 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 of this year the pipeline had some acquisitions in it. Maybe just address whether, you know, that pipeline is as active as ever.

Yeah, Craig. I mean, as usual, we don't discuss any specifics in terms of M&A targets. But I will say that, you know, there are several – areas that we continue to be very interested in from an acquisition standpoint, primarily in our parts and accessories segment, as well as technology, things that our business acceleration business unit is doing. So, yes, I would tell you that coming out as the macro economy looks to be still a little bit uncertain, but a little bit better than it was 90 days ago, I do think there will 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 does that factor into your thinking for 2021 if we see a change in tax?

Yeah, it's obviously a big variable, Craig, and it's something that our tax group works pretty tirelessly on, looking at the opportunities and, frankly, the impact of changes in rates. Given a global company as ours, there are different things that we can do structures-wise to make sure that we're maximizing both our income opportunity as well as understanding the tax benefits and potential impacts. So we'll be on it, obviously. The tax group did a pretty big sprint. When the tax new rulings kind of came out over Christmas a couple years ago, they'll be up for the task again this year should there be more changes. Perfect. Thanks so much.

At this time, we would like to turn the call back to Dave for some concluding remarks.

Thank you very much. Thank you all for attending our call. We really appreciate it. You know, we find ourselves in a very fortunate position of being able to offer fun and diverse recreational experiences compatible with social distancing. We're very excited about the surge in demand for new boats and boating experiences and bringing in new boaters, really in recent times, unprecedented numbers. And our brands and products are really shining in that environment. They're the go-to brands and products for new boaters. I think we recognize the unknowns and unknowables in the current situation, but we're excited that our 2022 plan remains very solidly in reach. Just one last thing I'd just like to reflect. We mentioned it earlier, but getting these awards from Forbes for being the best place to work for women, best place for diversity. That means a lot for a business like ours. It means we can attract the kind of talent and develop the talent we need to stay ahead in the future. So we're very, very excited about that. The last thing I would say is many of you know Bill Metzger, our former CFO, has been on all the previous calls with us. I'd like to thank Bill once more for all those years of exceptional service to Brunswick and for developing such a worthy successor in Ryans. Thank you all very much for attending.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect, everyone. Have a great day.