Brunswick Corporation

Good morning, and welcome to Brunswick Corporation's second quarter 2021 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, Investor Relations. Please go ahead, sir.

Good morning, and thank you for joining us. With me on the call this morning are Dave Falks, Brunswick CEO, and Ryan Glilam, 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, Branton. Good morning, everyone. Our business has had another outstanding quarter. We closed the first half of 2021 by delivering record results as a result of continuing strong retail demand, outstanding operational performance, and success in mitigating material supply and labor challenges. All of our businesses delivered exceptional growth during the quarter. Our propulsion business continued to realize strong outboard market share gains, leveraging the strongest product lineup in the industry. Our parts and accessories businesses continue to benefit from robust aftermarket demand, driven by elevated boating participation. And our boat business posted its second consecutive quarter of double-digit adjusted operating margins, despite significant supply chain, transportation, and labor challenges. Robust retail demand for our products in the first half of the year has driven field inventory levels to the lowest level in decades at approximately nine weeks on hand. And we are progressing our efforts to efficiently increase capacity across several of our facilities to satisfy orders from our global customer base and begin to replenish the pipeline. As many of you know, we've also had a busy few months on the M&A front. At the end of the quarter, our advanced systems group significantly expanded its product and brand portfolio by announcing the signing of a definitive agreement to purchase Navico, an industry leader in marine electronics. In addition, we announced in early July that Freedom has expanded into Spain through the acquisition of Phonotic Club. I'll touch on both these exciting transactions later in our discussion. Given the unique demand and inventory environment, together with continued strong boat usage through the prime season, which drives P&A sales, we have improved visibility on our ability to deliver against an extremely favorable outlook for the remainder of 2021. And consequently, we have increased our 2021 guidance. Before we discuss the results of the quarter, I wanted to share with you some updated demographic insights through the first half of 2021. and comparisons with the favorable trends we experienced in 2020 versus 2019 in the industry. I'm happy to report that we are not seeing any change in the significant metrics we shared with you during our first quarter earnings call in April. Brunswick's average boat buyer age continues to be two years younger than the industry average. Additionally, Brunswick's first-time boat buyers continue to be younger than our overall boat buyer demographic and three years younger than the industry. First-time boat buyers are trending more female than they did in 2020, and Brunswick over-indexes to the industry by approximately 800 basis points. In Freedom Boat Club, the average Freedom member continues to be almost three years younger than our typical boat-buying customer, and female Freedom members make up approximately 35% of our member base. We continue to outperform the industry in attracting younger and more diverse first-time boat buyers, positioning us for very strong growth in years to come. These trends are an extremely important validation of our strategy to secure a healthy future for Brunswick and are also favorable for the entire marine industry. I also wanted to share with you some awards that Brunswick received during the second quarter that provide more strategic proof points. Brunswick received six 2021 Boating Industry Top Product Awards, including for the Mercury Marine V12 600-horsepower Addo and the C-Ray 370 Sundancer Outboard we highlighted recently, but also for our Bayliner Element M15 entry-level boat, BEP Smart Battery Hub, Atwood Sahara Mark II Automatic Bilge Pump, and MotorGuides XI3 Kayak Trolley Motor. Brunswick has also been recognized by Forbes for the second year in a row as one of the best employers for women and ranked second overall in the engineering and manufacturing category. The winners were chosen based on a survey of 50,000 U.S. employees working for companies employing at least 1,000 people in their U.S. operations, and only 300 companies made the final list from the thousands of companies that were considered for the honor. Finally, Brunswick recently had three employees and a Freedom Boat Club franchisee, Bev Rosella, honored with a Women Making Waves Award from Boating Industry Magazine. We are very proud of these women leaders. As you know, equal opportunity, inclusion, and diversity are cornerstones of our culture. I'll now provide some second quarter highlights on our segments and the overall marine market. Our propulsion business continues to gain significant retail market share in outboard engines, especially in the higher horsepower categories, where we have focused higher levels of investment in recent years. For the first half of the year, Mercury has gained share in each horsepower category over 75 horsepower, with outsized gains in nodes in excess of 200 horsepower. I'm also pleased to announce that we began shipping the new 600 horsepower V12 Verado engine in late June. And as anticipated, demand has been extremely strong. We're essentially sold out of the V12 production slots for the remainder of 2021. And we estimate that just during the back half of 2021, we will sell more outboard engines in this above 500 horsepower class than was sold in the entire prior history of the outboard industry. Given the surging demand in the current environment and new product launches planned in the coming years, Mercury is accelerating additional capacity investments at its primary manufacturing center in Fond du Lac, Wisconsin, in order to maximize its ability to serve the market and capture further share. Our parts and accessories businesses experience significant top line and earnings growth and significantly overdrove expectations in the quarter due to outstanding execution robust aftermarket demand driven by elevated boating participation, and favorable weather conditions in many areas. The Advanced Systems Group, which has a larger OEM component to its business and also serves certain non-marine segments, benefited from prior year comparisons as a result of Q2 2020 customer COVID-related plant shutdowns. As a result, ASG realized significant growth across all product categories and delivered strong operating margins that were accretive to the overall segment. Finally, as I mentioned earlier, in late June, our Advanced Systems Group strengthened its product and brand portfolio and significantly expanded its scale and capabilities by announcing the signing of a definitive agreement to purchase Navico. This action will further accelerate our ACES strategy and will enhance our ability to provide complete, innovative digital solutions to our consumers and comprehensive integrated systems offerings to our OEM customers. We believe this transaction will close in the second half of 2021. Our boat segment had another outstanding quarter, posting its second consecutive quarter of double-digit adjusted operating margins despite significant supply chain uncertainty. while delivering output consistent with our production plans for the year. We ended the second quarter with historically low pipeline inventory levels due to consistent strong retail demand for our products. Given the continued robust retail demand and our dealers' continued desire to take all available product, our 2021 production slots are now sold out for the calendar year with five brands completely sold out through the 2022 model year. In fact, the sum of our wholesale orders for 2022 model year product is already roughly equal to our projected 2021 four-year wholesale boat group revenue. We continue to hire additional new production employees at most facilities to maintain production consistent with our stated plan. We remain on track with our plans to ramp up and staff the Palm Coast facility and expand our operations at Renault Certain Portugal. Additionally, we've identified capital-efficient investment options to further raise capacity to approximately 50,000 annual production units by 2023, should this volume of product be required. Freedom Boat Club also continues to exceed our expectations, growing both organically and through acquisition with a young and diverse customer base. With the recently announced acquisition of Fanatic Club and expansion into Spain, Freedom now has 314 locations and 44,000 memberships network-wide and is closing in on 4,000 boats in the overall Freedom fleet, with an increasing percentage of Brunswick product. The outstanding operational and financial performance I've been discussing has not been without some external challenges that our businesses continue to manage and mitigate, sometimes on a daily basis. Our supply chain teams in particular have performed extremely well. Winter storms in late first quarter and resulting power outages in central and southern United States disrupted the supply of oil-based resin and foam products throughout the second quarter. While tight semiconductor supply, raw material shortages, and transportation disruption and resulting cost increases continue to present challenges which we are actively managing. As a result, our businesses have implemented price increases that are higher than normal, but we believe are generally at the lower end of those implemented across the industry. The global reach of our supply network and our unique scale in the marine industry, together with our purposeful vertical integration, have so far enabled us to mitigate these challenges and keep our production plans on track for 2021. I want to thank our supply chain and operations teams, as well as our third-party supply partners, for continuing to work together to ensure the manufacturing continuity necessary to satisfy our robust market demand. Finally, labor conditions remain tight in many locations in which we manufacture product, but our talent acquisition teams have been working hard and successfully to add manufacturing and other talent to our teams as we increase production. Next, I'd like to review the sales performance of our business by region on a constant currency basis, excluding acquisitions. As expected, all regions posted significant sales growth in the quarter versus both 2020 and 2019. Domestic sales grew 55%, with international sales up 49% versus prior year. We are seeing strong performance across all international regions, with Asia Pacific still growing despite an extremely strong comparison in 2020. We continue to experience robust demand around the globe, especially for propulsion products, and we'll be working through backlogs in certain product categories through the remainder of 2021 and into 2022. This table provides more color on the recent performance of the U.S. marine retail market, comparing the first half of 2021 to same periods in 2020 and 2019. As is usual for this time of year, there's significant noise in the month-to-month SSI data, but the positive market trends continue. All both categories reported retail gains in the first half of 2021, continuing the momentum from 2020. Despite more difficult year-over-year comparisons in May and June, the main powerboat segments are still up 17% in the first half of 2021 versus 2020, and up 13% versus 2019. Brunswick's year-to-date unit retail performance is generally in line with market growth rates, with strength in outboard boat categories. Outboard engine unit registrations were up 5% in the first half of 2021 when compared with the same time period in 2020, with Mercury's first half growth more than doubling the market growth rate, resulting in significant market share gains, as I discussed earlier. As we enter the second half of the year, U.S. lead generation, dealer sentiment, and other leading indicators all remain very positive. Approximately 40% of the boats leaving our manufacturing facilities are retail sold, which is approximately three times historical averages. In addition, five of our brands, including Whaler, have all model year 2022 production slots already sold. All these factors give us high confidence in the continuing retail strength as we complete the 2021 selling season and move into 2022. I'll now turn the call over to Ryan for some additional comments on our financial performance.