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.