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 Neha Clark, Senior Vice President, Enterprise Finance, Brunswick Corporation. Please proceed.

Good morning, and thank you for joining us. With me on the call this morning are Dave Fouts, Brunswick CEO, and Ryan Gwilym, 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 forensics.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. Our business has executed a strong second quarter, benefiting from market share gains, well-received new products, solid operational performance, and diligent cost control. We delivered $1.7 billion in net sales and adjusted earnings per share of $2.35, including the financial impact of the IT security incident, which I'll discuss more in a moment. Mercury Marine continues to gain market share, with U.S. outboard retail market share up 140 basis points year-to-date versus prior year. While the new boat market continues to face headwinds, there's been relative improvement in recent months, with preliminary June U.S. SSI main powerboat retail turning positive and Brunswick outperforming the market in June and year-to-date. As we move through the core season, boat field inventory remains at an appropriate level in most categories, and we close the second quarter with around 19,000 units in our global pipeline. We are focused on ensuring the pipelines remain healthy, exiting 2023 and going into 2024, balancing the need for our dealers and other channel partners to carry a good representation of our portfolio at their locations, while ensuring that we maintain inventory freshness. We generated strong free cash flow of $193 million in the second quarter. resulting in 2023 first half free cash flow coming in $144 million higher than prior year. In addition, we continue to be aggressive with share repurchases, executing $132 million of repurchases year-to-date. We are relentlessly executing our strategic priorities, including advancing our ACES initiatives, investing in new products, progressing our operational excellence goals, and implementing structural cost reduction actions across the enterprise. On June 13th, we announced that we'd been impacted by an IT security incident, which ultimately resulted in second quarter financial results that were lower than initial expectations. The disruption associated with the IT security incident was most significant in our propulsion and engine parts and accessories segments, and because of the proximity to the end of the quarter, there was limited opportunity to recover fully within the same period. Within nine days, the company announced that all primary global manufacturing and distribution facilities were fully operational, with no significant residual impacts. We have the opportunity to recover some lost production and distribution across our businesses, which will partially offset lost days in the second quarter. However, lost production days on high horsepower outboard engines will be challenging to recover because the production schedule was already full for the balance of the year. We estimate the financial impact to be approximately $80 million to $85 million of revenue in the quarter, and $60 million to $70 million for the full year. I'll turn now to some of the segment highlights that facilitated a solid second quarter. Prior to the disruption from the IT security incident, our high horsepower outward engine production ramp-up was progressing and has since resumed, allowing us to increase shipments to repower customers and OEM partners. Mercury Marine continues to expand outboard propulsion retail market share around the globe, demonstrating the strength of our comprehensive propulsion product portfolio. During the quarter, we launched the Mercury Racing 500R outboard, shipped the first model in our Avatar electric outboard lineup to global customers, and announced that we've begun serial production of the next two models. Our engine parts and accessories businesses performed as expected, reflecting anticipated sales and earnings declines versus a record second quarter of 2022, although sales were up 12% versus the second quarter of 2019. Second quarter sales in the U.S. products portion of the business were near flat to Q2 2022, reflecting strong sales growth exiting the quarter. we continued to progress the transition to the new Brownsburg, Indiana distribution center. However, sales in the distribution portion of the business were down versus 2022, as dealers and retailers continued to hold lower levels of inventory, although turns have improved into the season. As foreseen, Navico Group posted lower second quarter sales versus 2022, as stocking pressure by some retail channel partners continued, but with improving trends in many retailers in the latter part of the period. Our recently launched products, including the Lowrance HDS Pro Fishfinder and Simrad Halo Radar, are performing very well in the market. Additionally, restructuring actions were accelerated, generating lower operating expenses versus prior year. Finally, our bulk business delivered double-digit adjusted operating margins for the fifth consecutive quarter. despite increased promotions and discounting on select product lines. And June retail continued the strengthening upward trend. Freedom Boat Club continues to experience strong same-store membership sales growth on a sequential basis, and now has 400 locations and nearly 57,000 membership agreements, covering 90,000 members network-wide, all while generating exceptionally strong synergy sales across our marine portfolio. Shifting to external factors, higher interest rates and prices continue to be a headwind for buyers, particularly of smaller product, with boat loan rates recently exceeding 9%. Wildfires have also impacted an already softer Canadian retail market. From a dealer perspective, sentiment remains cautious, and while inventory levels for Brunswick's channel partners are healthy, dealers are proceeding with some caution and carefully monitoring sales as they plan replenishment. Discounting and promotional activity is close to or at 2019 levels and is being successful in supporting retail in the height of the selling season. Our internal voter sentiment surveys suggest voting participation remains above prior year, with Google search trends on terms related to voting also improving in June. In addition, Brunswick's ripple voting online community has now grown to more than 10,000 members. The positive retail numbers in peak season are very welcome. However, we do not see the fundamental pressures on consumers driven by elevated interest rates and higher prices easing in the short term. So we are taking a very balanced approach to production planning while maintaining flexibility. Shifting to a global view of revenue, overall, we saw a 7% sales decline on a constant currency basis, excluding acquisitions, including the impact of the IT security incident. Year-to-date, the U.S. market is showing relative strength versus international markets, with sales flat to 2022. From an industry view, U.S. SSI main powerboat second quarter retail unit sales improved sequentially from the first quarter. The main powerboat segment was down 6% versus the second quarter of 2022. However, preliminary June U.S. SSI was 2% above prior year. Brunswick performed better than industry relative to both periods, picking up share through strong performance by our premium fiberglass and aluminum brands, supported by planned promotions and marketing on select product lines. Outboard engine industry data was down 6% in the second quarter versus prior year. Mercury continues to outperform the industry, with second quarter share now above 50%. reflecting retail share gains of 530 basis points in the 150 and above horsepower output engine categories. We continue to manage inventory levels closely through the season. As we look at end of quarter pipelines, we see unit inventory levels recovered versus recent years, but still below the pre-COVID level in 2019, particularly for premium product lines. As we look at the number of units in the pipeline on a boats per dealer basis, we see approximately 75% of our dealers with inventory levels less than or equal to 2019. Moving on to recent new products and innovation. As I mentioned earlier, we recently launched the Mercury Racing 500R, which delivers high performance for fast luxury sport boats, and it's incredibly light, weighing only 720 pounds. The 500R replaces the 450R and joins the Mercury Racing high horsepower lineup that already includes the 300R and the new 400R. Earlier this year, we launched the award-winning 7.5E Mercury Abator electric outboard. We've now produced around 2,000 units, and we have strong orders from around the globe. We recently announced the beginning of serial production for the next two models in the Avatar lineup, the 20E and 35E, which we expect to begin shipping to customers at the end of the summer. The launch of the 500R and the production of the new Avatar models reinforce our intention to be the industry leader in both internal combustion and electric propulsion. Navigle Group continues to release exciting new products, but also software upgrades, facilitated by the flexible Android-based software architecture deployed on its newest products, and reinforcing the increasing importance of software and content upgrades as new sources of revenue and value creation for our business. Freedom Boat Club continues to expand rapidly, recently announcing its 400th location globally, which is located in Jupiter, Florida. We've added an average of around one Freedom location per week since the acquisition in 2019, including 40 international locations. We're also continuing to build out the Freedom ecosystem, including successfully expanding our Botteca pre-owned boat business, which takes boats from Freedom, refurbishes them, and resells them into the pre-owned market. I'll now turn the call over to Ryan to provide additional comments on our financial performance and outlook.