Brunswick Corporation

Good morning, and welcome to Brunswick Corporation's first quarter 2023 earnings conference call. All participants will be in the listen-only mode until the question and answer period. Today's meeting will be recorded. If you have any objections, you may disconnect at this time. I would now like to introduce Neha Clark, Senior Vice President, Enterprise Finance for Brunswick Corporation. Please go ahead.

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

Thanks, Neha, and good morning, everyone. We started the year strongly, delivering record first-quarter net sales of more than $1.7 billion and adjusted operating earnings of $262 million. Our business continued to leverage our investments in new products, technology, and innovation across the enterprise, high horsepower outboard manufacturing capacity, and premium boat manufacturing capacity. while taking significant actions to reduce structural costs in a macroeconomic environment that continues to be challenging. Our first quarter adjusted earnings per share of $2.57 highlights the robustness of our business and the strength of our portfolio. There were notable divisional highlights, including our propulsion business delivering outstanding net sales, adjusted operating earnings and operating margin, and our boat business delivering double-digit adjusted operating margins for the fourth consecutive quarter, despite increased promotion and discounting on certain product lines. Boat field inventory is at an appropriate level in most categories going into the core retail season, and we exited the first quarter with 21,500 global pipeline units. Our boat and engine production levels finished above prior year, despite some supply chain challenges. We made significant gains in free cash flow, improving 55% versus first quarter 2022, largely driven by working capital improvements across the business. In addition, as the overall market and the legislation and recreation sector continue to see valuation pressures, we continue to be aggressive with share repurchases, executing $60 million of repurchases in the quarter. Before I move into the segment overview, let me provide a reminder regarding our recently updated segment reporting. We updated our reportable segments from three segments to four. propulsion, engine parts and accessories, Navico Group, and boat. The previous parts and accessories reportable segment is now split into the engine parts and accessories segment and the Navico Group segment. The engine parts and accessories segment is inclusive of products comprised of parts and consumables primarily related to our propulsion systems, such as oils and lubricants, electrical products, and boat parts and systems. together with our third-party distribution businesses. The Navico Group segment now represents the organizational integration between the legacy Advanced Systems Group business with two key acquisitions that were completed in late 2021, Navico and RelyOn. We determined this was the right time to change our reportable segments given the continued integration of the Navico business and the significant restructuring actions completed in early 2023. We feel the change will provide better visibility into our company and more closely aligned with our internal operating structure. With that background, let me now turn to some of the segment highlights that facilitated a very strong first quarter, despite the record prior year comparison. Our propulsion business continues to deliver outstanding results with 7% top-line growth versus the first quarter of 2022, driven by increased shipments of high-horsepower outboard product to many international customers and OEM partners, enabled by the recent manufacturing capacity expansion. The increased shipments of high horsepower products combined with reduced production of lower horsepower products drove strong product mix, which when coupled with operational efficiencies resulted in record first quarter operating earnings and an operating margin of 20%. Our engine parts and accessories business had a solid quarter, but as anticipated experienced sales and earnings declines versus the record first quarter of 2022. although up 35% versus the first quarter of 2019. U.S. product sales were ahead of first quarter 2022, while our third-party distribution businesses were down versus 2022 as dealers and retailers right-sized inventories. As foreseen, Navico Group had a challenging start to the quarter, with lower sales into the retail channel and to RBOEMs. and unfavorable currency, leading to top-line declines early in the quarter, with notable improvements in March. Operating earnings declined versus prior year, as lower sales coupled with higher material inflation and temporary margin pressures related to a new product launch were partially offset by the positive impact of major integration and restructuring actions and cost reduction measures. Navico Group announced the closure of nine locations and completed headcount reduction actions begun in Q3 2022, which impacted approximately 10% of the Navico Group workforce. Finally, our bulk business posted robust top-line growth enabled by broad-based gains across categories. Both segments delivered strong earnings growth with double-digit adjusted operating margins for the fourth consecutive quarter, despite higher discounts. Finally, Freedom Boat Club had strong same-store membership sales in the quarter and also benefited from acquisitions completed in Q2 2022. Freedom's growth trajectory continues with more than 380 locations, and nearly 55,000 membership agreements covering 87,000 members network-wide, all while generating exceptionally strong synergy sales across our marine portfolio. Looking at external factors, cost inflation and interest rate increases have moderated or will remain a challenge for buyers of value product. with boat loan rates recently stabilizing between 8% and 9% versus 5% to 6% immediately pre-COVID. Our supply chain environment has broadly significantly improved. However, an industry-wide supplier part recall impacted a large number of our stern drive fiberglass units in production and in dealer inventory in the quarter. It was partially remedied in the quarter, and we expect it to be fully remedied in the early part of the second quarter, but it may impact SSI through Q2. As we wrapped the bulk of our boat shows, results were better than expected, with Sea Ray and Boston Whaler in particular reporting strong sales and lead generation. Mercury continued to have record share of engines displayed on boats at the shows, and in many cases, such as the recent Palm Beach International Boat Show, had more than 60% share. We believe these shows are a good signal of consumer interest, particularly in premium products. Our internal Boater Sentiment Survey suggests boat participation and purchase consideration are above prior year, with Google search trends slightly down. Additionally, Freedom Boat Club is experiencing higher trips per member versus prior year. Discounting is present primarily on value models, but still below pre-COVID levels in most cases, while the percentage of boats being financed at the point of sale versus all cash transactions is lower than in 2022 and has returned to levels similar to 2019. From a dealer standpoint, inventory levels are healthy and very current ahead of the season. Dealers are considering the higher dollar value of inventory in addition to the number of units in many cases. However, orders remain on track with no signs of material wholesale cancellations. Dealer sentiment reflects macro concerns but remains cautiously optimistic as we move into the peak season. Shifting to a global view of revenue, overall, we delivered 3% sales growth on a constant currency basis, excluding acquisitions, led by gains in our propulsion in both segments. Our two largest regions, the US and Europe, grew sales in the first quarter versus the prior year quarter by 5% and 2%, respectively. And rest of the world experienced significant growth, driven primarily by increased sales of high horsepower outboard engines in those markets. Moving now to U.S. retail performance, our internal new boat unit retail data reflected sequential improvement throughout the quarter with declines in January and February shifting to growth of 4% versus prior year in the month of March. For the quarter, our internal new boat retail unit sales finished slightly better than expectations, declining 10% versus the first quarter of 2022. Overall, premium segments continued to perform well, while value fiberglass models experienced some pressure. Our aluminum brands had particularly strong internal retail performance as our planned promotions and marketing helped drive early season retail activity. Note that the preliminary first quarter SSI main powerboat data released earlier this week reflected a roughly 20% decline from 2022, A gap versus our internal data, which may close as industry reporting becomes more complete in the coming months. Outboard engine industry data was favorable, with U.S. industry registrations finishing up 12% for the month of March versus prior year, and down just 2% for the first quarter versus first quarter 2022. Mercury performance continues to reflect gains in high horsepower, with over 600 points of retail share gain in the 150 horsepower engines and above categories during the last five years. Turning to pipelines, U.S. unit inventory is generally well-balanced as we enter the core retail selling season and remains thousands of units below pre-COVID level. As expected, the pipeline of aluminum product has replenished to a normalized level. Value fiberglass inventory is also restocked, while premium fiberglass inventory remains more lean for some product lines. Our brands have done an excellent job getting our many exciting new products to our dealers ahead of the prime 2023 selling season, generating very positive momentum coming out of the early season boat shows. we also have appropriate programs events and discounts in place going into the primary selling season and will continue to monitor and respond as needed through the coming months i'll now turn the call over to ryan to provide additional comments on our financial performance and outlook thanks dave and good morning everyone brother delivered an excellent start to 2023 with record sales and eps for any first quarter in our history