Brunswick Corporation

Good morning. Welcome to Brunswick Corporation's third quarter 2023 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 like to introduce Neha Clark, Senior Vice President, Enterprise Finance, Brunswick Corporation. You may begin.

Good morning, and thank you for joining us. With me on the call this morning are Dave Fowkes, Grunswick CEO, and Ryan Gilliam, 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. Our businesses delivered a solid third quarter as continued market share gains, strength in new products, efficient operations at our facilities, comprehensive cost control measures, and the resilient composition of our portfolio drove strong earnings and free cash flow despite the ongoing challenging macroeconomic backdrop. We delivered $1.6 billion in net sales and slightly stronger than expected adjusted earnings per share of $2.42 in the quarter, in the upper half of our guidance range. We also generated strong free cash flow of $143 million in the third quarter, resulting in free cash flow conversion of 84% and delivering year-to-date free cash flow $233 million higher than prior year. In addition, we continue to be aggressive with share repurchases, executing $220 million of repurchases year-to-date. Mercury Marine has continued to capture solid market share gains this year, with U.S. outboard retail market share up 90 basis points year-to-date versus prior year. The new bulk market is on pace to finish generally in line with our estimates of down high single digits, and Brunswick brands continue to outperform the market. As we move out of the course season, we continue to actively manage our global boat field inventory levels, and we close the third quarter with 32.8 weeks on hand. We're working closely with our marine dealers and channel partners to maintain balanced inventory levels exiting 2023, targeting being generally in line with historical norms, which allows each location to carry a good representation of our model portfolio while avoiding overstocking. In addition, we're providing strong but targeted promotional support for retail, investing in new products and technology, progressing our operational excellence goals, and implementing structural cost reduction actions across the enterprise. I'll now turn to some of the segment highlights for the quarter. Our propulsion business delivered top-line growth with slightly lower earnings versus a record third quarter 2022. driven by growth in outboard engines, especially in high horsepower categories, and controls and rigging, offset by relatively weaker stern drive sails. Mercury gained 130 basis points of market share in high horsepower outboard engines, over 150 horsepower versus 2022, as additional production capacity came online. During the quarter, the business also successfully ratified a new five-year collective bargaining agreement with the union representing workers at its engine production facility in Fond du Lac, Wisconsin. And in addition, continued strong production of Avatar electric outboards with 4,000 units manufactured to date. As we move into the off-season, Mercury is seeing some slowing of OEM orders as the OEMs scale back production to control field inventory going into 2024. We expect OEMs to remain cautious as they assess customer sentiment at late 2023 and early 2024 boat shows. While this is a short-term headwind, it is allowing Mercury to gain share in the repower market, especially in high horsepower engines. Our engine parts and accessories business demonstrated steady performance in the quarter, reflecting an improving sequential trend. Sales for the products portion of the business were up 4% versus prior year, as consumers used their boats in the primary season. Distribution business sales were down year over year, which showed relative improvement from earlier in the year, as dealer and retailer inventory destocking patterns moderated. Overall, segment sales were up 24% versus the third quarter of 2019. As anticipated, Navico Group posted higher gross and operating margins versus third quarter 2022, despite lower sales, as slower marine and RV OEM orders offset improving trends in aftermarket channels. Retailer stocking is recovering as we move into the fourth quarter, with well-received new product offerings driving strong retail pull-through as we enter the holiday season. Additionally, acceleration of planned restructuring efforts continues to result in reduced operating expenses versus prior year. Finally, our boat business performs a plan, continuing to introduce new models and white space brands and gaining share, while adjusting production to manage pipelines. The recently launched Navan Premium Adventure brand is nearly sold out for model year 2024, and the refreshed Bayliner brand has also been well received. Freedom Boat Club continues to grow memberships and now has 400 locations and nearly 60,000 membership agreements covering more than 91,000 members network-wide, all while generating exceptionally strong synergy sales across our marine portfolio. Shifting to external factors, stabilizing factors include strong employment, moderating inflation, and a reduced pace of interest rate increases. However, despite the promotional environment and stable book purchase consideration, higher prices, high interest rates, and credit availability remain strong headwinds for consumers. On a positive note, voting participation remains strong. Despite a fairly strong main selling season in 2023, buoyed to some extent by promotions, going into the off-season, dealers are healthy but anxious to avoid holding excess inventory ahead of an uncertain 2024, and will also be closely monitoring customer behavior at upcoming and early 2024 boat shows. With field pipelines replenished, boat OEMs are reducing production rates by taking out weeks of production or shifts in Q4 to align with anticipated retail in 2024, resulting in lower order rates for Mercury engines and Navico Group OEM products. The order softness continues to be greater for smaller value boats and lower horsepower engines, with larger premium products not immune but continuing to display relative strength. Given these factors, we are maintaining production discipline, which may add pressure in the short term, but will set up for a more predictable first half of 2024. Shifting now to a global view of revenue in the quarter, overall, we saw a 7% sales decline on a constant currency basis. Year-to-date, the U.S. market is showing relative strength versus international markets with sales relatively flat to 2022. U.S. new boat industry retail was flat in the quarter versus 2022, with year-to-date retail generally in line with expectations of down 7.5% versus 2022, and Brunswick growing share in both periods. Overall, year-to-date, Brunswick has performed better than the industry, picking up share, particularly through strong performance by our pontoon, premium fiberglass, and tow brands. supported by planned promotions and marketing on select product lines. Outboard engine industry retail units were up 3% in the third quarter versus prior year, bringing year-to-date unit retail to down 2%. Mercury continues to outperform the industry with third quarter share gains of 160 basis points in greater than 30 horsepower categories. We are actively managing both pipelines to achieve year-end levels within historical norms and are exiting quarter three with global weeks on hand at a healthy level of 32.8 weeks. We anticipate ending the year with U.S. pipeline levels in line with expectations at approximately 36 weeks and approximately 14,000 units. versus approximately 35 weeks and 16,000 units on hand at the end of 2019. As is normally the case, international vote pipelines will be higher. Let me shift now to discuss some exciting new growth opportunities across our businesses. We're thrilled to add flight to our portfolio of brands and product categories. E-foiling is an emerging and disruptive activity that allows for an extended hours-long surfing experience on inshore or coastal waters without the need for a wake boat or sail assistance. And flight is the premium brand in the space with high market share. The flight team has already extended its product line to an easy-to-ride scooter and has many further developments in the pipeline. Through Mercury Marine in Brunswick, Flight will have access to manufacturing and product technology and the world's largest marine distribution network. As I mentioned earlier, we recently launched our new premium adventure brand and product line, Navan, at the Cannes International Boat Show. This class of boat is very popular in Europe and gaining popularity in the U.S., and the two initial products, which have begun serial production, are nearly sold out for the 2024 model year. The media reception has been very strong, and the new models have been nominated for Best of Boats and European Power Boat of the Year 2024 awards. You may also have seen that just a few days ago, we announced Brunswick Finance, an online retail finance solution that can be integrated into Brunswick and Thiela partner websites to provide rapid customer finance approvals in addition to supporting promotional financing. We're beginning to roll out the solution in Q4. And finally, Freedom Boat Club continues to expand rapidly in the Australian market, recently announcing its seventh location. We see the ANCP region as a substantial new opportunity for freedom growth. I'll now turn the call over to Ryan to provide some additional comments on our financial performance and outlook.