Brunswick Corporation

Good morning, and welcome to Brunswick Corporation's third 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 Chris Decker, Vice President, General Counsel, and Corporate Secretary.

Good morning, and thank you for joining us. With me on the call this morning are Dave Fowlkes, Brunswick CEO, and Ryan Willem, CFO. Before we begin with our prepared remarks, I would like to remind everyone that during this call, our comments will include certain forward-looking statements about future results. Please keep in mind that our actual results could differ materially from these expectations. For details on the factors to consider, please refer to our recent SEC filings 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 Consolidated Financial Statements accompanying today's results. I will now turn the call over to Dave. Thanks, Chris, and good morning, everyone.

Each of our businesses delivered outstanding operating results in the third quarter. Our ability to capitalize on very robust retail demand, which was enhanced by expanded voting participation, and our compelling portfolio of industry-leading brands drove excellent financial performance and value for our shareholders. The power of our marine platform and our investments in operational excellence were on full display as we accelerated production levels to both meet retail demand, which continues to be elevated even as we exit the primary selling season in the U.S., and begin the process of replenishing historically low pipeline inventory levels. Our extraordinarily strong free cash flow generation provides us with the flexibility to execute our capital strategy, which amongst other things, encompasses our planned investments and growth initiatives, including new products, advancing our ACES strategy, and maximizing the reach of Freedom Boat Club. Our propulsion business continues to gain appreciable retail market share, particularly in higher horsepower categories, as a direct result of our product leadership efforts, and has yielded many new OEM customers and new dealer relationships throughout the year. Our parts and accessories business delivered significant top-line and earnings growth as increased boating participation and favorable weather, which extended the boating season in the U.S., drove strong aftermarket sales, while OEM production ramp-ups across the industry also created high demand for our full range of OEM systems and services. Our premium boat brands remain market leaders in their categories, and our value brands offered attractive entry points to new and returning former boaters. The surge in retail demand resulted in historically low pipeline inventory levels, with only 14 weeks of inventory on hand, or 48 percent fewer boats in dealer inventory at the end of the third quarter 2020 versus the end of the third quarter 2019. As a result, most of our brands have all production slots sold through the 2021 model year, and our Sierra and Boston Whaler brands have production slots sold out into the 2022 model year. Finally, Freedom Boat Club continues to outperform our expectations, as evidenced by its growth to 244 locations and almost 36,500 memberships company-wide, with over 3,000 new memberships added in the third quarter alone. Finally, although we continue to operate in an uncertain environment, our enhanced visibility into the outlook for our businesses enables us to provide guidance for the remainder of 2020 as well as 2021. which Ryan and I will speak to in a few minutes. Brunswick continues to outperform the industry in attracting new and more diverse boaters, which is positioning us very strongly for continued growth. Similar to our commentary in the second quarter call, more than half of the sales of Brunswick boats in the period from June through August were to first-time buyers or returning lapsed boaters. with the average age of Brunswick boat buyers being the youngest since 2011 and younger than the overall industry. Freedom Boat Club membership trends towards an even younger demographic, with the average Freedom member being three years younger than the average owner of a Brunswick boat. The Freedom operating model allows younger boaters to get on the water frequently with high-quality products prepared and ready to go for a day with family or friends. Boating participation has also been more diverse throughout 2020. Over the last several months, the percentage of women buying boats has equaled the highest on record, while the percentage of new female members of Freedom is double the percentage of women registering new boats. More recently, in August, we saw an uptick in Hispanic and Asian buyers of Brunswick products and an increase in Hispanic membership of Freedom. It is critical to the success of Brunswick and our industry that we continue to drive more diverse boating participation and find ways to engage with non-traditional boaters through new products and participation models and advances in our digital capabilities. I'll now provide some highlights on our segments and the overall marine market. Our propulsion business continues to outperform the market due to the strength of our industry-leading product lineups. Pipeline inventory of Mercury outboard engines is significantly lower than in past years, and we continue to successfully ramp production to refill pipelines and meet exceptionally strong customer demand. Mercury continues to gain significant retail market share in outboard engines, especially in high horsepower categories, where we have focused higher levels of investment in recent years. As a result of our constant product innovation, and the ability to quickly ramp production as a result of the capacity increases in 2018 and 19, Mercury continues to successfully execute its strategy to win new OEM customers. A new relationship with Sportsman and an expanded relationship with Beneteau, the largest bulk manufacturer outside the U.S., were announced in just the last two months. And there are many more new and enhanced partnerships in process. Mercury's outstanding products spanning capacity, and excellent operational performance have also led to new dealer wins, with 60 new repowered dealers added so far in 2020, resulting in an improved sales mix. Finally, the additional capacity has allowed us to serve more international customers, where our higher horsepower commercial derivatives continue to take market share. Mercury's aggressive new product development cadence remains on track, with an all-new forward-facing Wake Sports Drive launched in August and significant additional new product launches coming in the next six months. For our P&A segment, third-quarter results were bolstered by very healthy boat usage as favorable weather continued into the fall for many regions of the U.S. Our distribution business, which saw revenue growth of more than 30 percent versus 2019, was able to capitalize on increased participation and extended season in both the marine and RV spaces. Our engine P&A business also enjoyed a strong quarter, supplying products to our dealers to support increased service needs. Dealers have commented that they are four, six, or even eight weeks behind on servicing, which should continue to generate P&A sales into the traditional off-seasons. The OEM portion of the P&A business also had a strong quarter as boat manufacturers ramped up production to satisfy demand and rebuild pipelines. The Advanced Systems Group, which includes our power products and Atwood businesses, demonstrated significant year-over-year sales and earnings improvements, leveraging the same aftermarket and OEM trends. Including ASG, our P&A business represented almost 40% of the company's sales in the quarter and over half of the operating earnings With margins continuing to expand, the steady annuity-based business strengthens our overall financial profile and provides a robust baseline of earnings from which we can continuously invest in our businesses and return capital to shareholders. Our bulk business had a fantastic quarter, with top-line earnings and margin improvements across the lineup. With adjusted operating leverage of over 35%, the operating performance of the business in the presence of strong wholesale demand, but also the challenge of rapidly ramping up production, creates confidence that this business will achieve its strategic goals. Pipeline inventory levels, a key driver of future wholesale boat sales, ended the quarter at approximately 14 weeks, the lowest level at the end of the third quarter for the last two decades. Austin Whaler and C-Ray have seen very strong retail sales, and their dealer inventories are especially low. Our value brands have also performed well at retail and will also require significant pipeline replenishment. We continue to hire additional workers at most facilities to ramp up production, but it is very unlikely that pipelines will be fully rebuilt in 2021. Freedom Boat Club continues to exceed our growth expectations. with memberships increasing 61% since we acquired the business last May. In addition, sales of Brunswick products into the franchise network are exceeding expectations, with over 800 boats either purchased or on order since acquisition, each rigged with a mercury engine and equipped with LP&A products. Just recently, Freedom was named to Entrepreneur Magazine's first top growth franchises list, which recognizes the 150 companies with the greatest positive franchise unit growth in North America over a three-year period. Just a few weeks ago, the NHL Stanley Cup champions, Tampa Bay Lightning, held their championship parade on the water in Tampa using 20 boats from Freedom Boat Club, making national headlines for one of the most unique championship celebrations in history. Finally, our investments in accelerating and improving our digital assets and capabilities continue to bear fruit as many in-person industry shows are scaled down or canceled due to COVID-19. This morning's announcement regarding the cancellation of the Miami International Boat Show, along with many other early season 2021 shows, was anticipated and does not influence our wholesale and retail demand projections. Our digital and e-commerce technology is enabling us to reach and engage with a wider audience of potential new boaters, dealers, and other customers in addition to launching new products online. A recent virtual trade show held by our land and sea distribution business generated 16 percent higher sales than the equivalent physical show last year. Next, I'd like to review the sales performance of our business by region on a constant currency basis. Third quarter sales increased versus 2019 in all regions and across most businesses. In the U.S., total revenues were 27% higher, while international sales were up 24%. Asia continues to experience robust demand for higher horsepower outboards, mainly for commercial purposes and steady P&A sales. Other regions of the world, including Europe and Canada, reversed the challenges of the previous quarter and reported strong year-over-year growth. International sales are up 5% year-to-date, led by gains in the propulsion business in most regions. This table provides some color on the performance of the U.S. marine retail market. The first three quarters represent approximately 90 percent of the total sales volume for the year, and it's becoming a very strong year, as most of you know. All bill categories reported retail gains in the third quarter and positive growth for the year. The main powerboat segments were up 39 percent in the third quarter and are up over 8 percent year-to-date, with Brunswick's retail performance exceeding the market. Outboard engine unit registrations were up 34% in the quarter, with Mercury significantly outperforming the market, as they have done for all of 2020. Mercury gained retail share in the third quarter in just about every horsepower node, with outsized increases in large outboard engines over 200 horsepower. Closing out the year, we anticipate fourth quarter retail to continue in growth mode, as lead generation, finance applications, dealer sentiment, and other leading indicators are all very positive. As another reminder that the pipelines remain both lean and current, our Blue Water retail finance business is seeing more than 75 percent of applications being related to current model year boats, approximately double the percentage at the same time last year when pipeline inventory was less current. All these factors give us confidence in the retail market as we move into 2021. I'll now turn the call over to Ryan for additional comments on our financial performance.