Good morning and welcome to Brunswick Corporation's first 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 Ryan Gwillim, Vice President, Finance and Treasurer.

Good morning and thank you for joining us. With me on the call this morning are Dave Foulkes, Brunswick's CEO and Bill Metzger, 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 the details on the factors to consider, please refer to our recent SEC filings and today's press release. All of these documents are available at our website at brunswick.com. During our presentation, we will also 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 would now like to turn the call over to Dave.

Thanks Ryan and good morning everyone. Before we start this morning, I would like to take a minute to recognize the immense impact that the COVID-19 pandemic has had on our employees, our business partners and the communities in which we operate. Brunswick has taken many steps to help those who interact with us on a daily basis, endure during these times and prepare for the resumption of more normal activity. I couldn't be more proud of our over 12,000 global employees for navigating through this dynamic environment, juggling family life with work and for staying positive despite everything going on in the world around them. To support our employees, we implemented prompt, coordinated production shutdowns and recently, progressive orderly restarts, instituted a wage continuity program and we are quick to mandate work from home policies. As our employees return to work in many locations across the globe, we have instituted many health and safety measures including temperature screening, enhanced PPE and distancing procedures and have completed deep cleaning processes in order to provide a safe environment in which our employees can work productively. We know this is a difficult time for our dealers, suppliers and other business partners. To enable our dealer network to continue servicing their customer base, we have kept open our global distribution business which delivers critical parts and accessories, same or next day. We have also worked with our floor-plan lenders to extend interest and curtailment payment terms during a time when many product showrooms are closed. Finally, we are working with our supply base to match purchases with production needs and ensure a smooth production ramp up. Lastly, we have responded to the needs of our communities in the fight against the virus. We have donated PPE to local health care facilities in many…

Thanks Dave and good morning everyone. For the first quarter, net sales were down 8%, while operating earnings on an as adjusted basis decreased by 10%. Adjusted operating margin stayed relatively consistent with prior year at 11.7% as austerity measures and operating expense control offset the impact of lost sales volume and other costs and charges incurred in response to the pandemic. We finished the quarter with an adjusted EPS of $0.96 per share, up 2% year-over-year, primarily due to lower shares outstanding. Before I review segment performance in the quarter, I would like to remind everyone that this is the first quarter we are breaking propulsion and parts and accessories businesses into two reporting segments, consistent with the discussion on the January call. Starting with the propulsion segment. Revenue was relatively consistent with Q1 2019 as continued strong demand for higher horsepower outboard engine categories and related controls and systems was offset as anticipated by weaker sales of lower horsepower outboards and sterndrive engines. As Dave mentioned earlier, we continue to gain substantial market share in higher horsepower engines, especially in saltwater markets as demonstrated by our record share performance at the Miami Boat Show in February. Mercury was able to leverage its distribution capabilities and existing inventory to continue shipments of engines to meet demand through the end of the quarter and beyond. Adjusted operating margins and operating earnings were up slightly in the quarter, including benefits from cost reduction activities and a more favorable sales mix. The impact of these items exceeded increased costs resulting from COVID-19 disruptions, including the temporary suspension of manufacturing and the impact of unfavorable changes in foreign exchange rates and tariffs. In the parts and accessories segment, revenues were down 4% and operating earnings were down 3% versus 2019, as strong sales…

Thanks Bill. Although we find ourselves in a challenging operating and economic environment, our businesses are still executing well against our operating and strategic priorities. The health and safety of our employees as we restart and continue to operate our businesses, of course, continues to be our priority across the enterprise. Amongst the top priorities for our propulsion segment, is continuing to expand market share, especially in the greater than 175 horsepower category, enabled by the added production capacity now online for higher horsepower engines with mix improvements arising from our ability to satisfy greater levels of demand in dealer, repower and international channels. Optimizing production and controlling costs through this period of uncertainty is, of course, a priority. However, we also remain focused on further developing exciting new products and technologies for our engines and related control systems that will enable top line and earnings growth into the future. Finally, we remain committed to delivering improved technology and performance in our sterndrive/inboard lineup of engines. These products serve a smaller yet loyal customer base and it remains our goal to retain our market leadership position in this category. Turning to our parts and accessories segment. Our primary objectives remain relatively unchanged. We anticipate boat usage continuing to be strong even with social distancing measures continuing into the future. As a reminder, our P&A business is 75% aftermarket based and is well equipped to perform in challenging economic conditions as boaters continue to use their boats and generate the need for consumables and replacement parts. Power Products, which is part of the advanced systems group, continues to be the market leader in electrical systems and products and is performing well even in these difficult conditions. Our systems integration business continues to provide growth opportunities as boat OEMs face increasing technical…

[Operator Instructions]. Our first question comes from James Hardiman with Wedbush Securities. You may proceed with your question.

Good morning. Thanks for taking my call. So I was hoping you could hone in a little bit on the April commentary. I think MarineMax talked about April being up last week and, at least more recently, it sounds like things are maybe turning up a little bit for you guys. I guess, maybe just speak to how that's even possible in the current environment? And then within the context of your broader guidance, I know you don't have technical guidance, but you have given us a lot of building blocks, most notably that retail is going to be down high teens, low-20s. I am assuming that that presumes that the April sort of relative strength is not sustainable? How should we think through that?

Yes. Hi James, it's Dave here. April has clearly been a month of two distinct halves for us. The first half was a little more like the end of March. Right now, it is the first time that we have kind of seen all of the indicators pointing in a positive direction. We certainly have seen good leading indicators on the loan applications, which are up substantially recently versus last year. And certainly, we are getting more pull from dealerships, I would say, particularly at the premium end of the marketplace. So yes, I would say the last kind of week-and-a-half have been significantly different. Obviously, we are excited about that trajectory. We are hoping that it's sustainable. But we are not completely sure. Obviously, there are a number of things that could happen. Is it fully? No, that trajectory is not fully built into the full year guidance that we provided. I think our full year guidance is much more of a balance between what we have seen over a longer recent period.

Okay. That's helpful. And then is there any way to think about, I mean, again, you have given us how to think about the industry for the year, right, high teens, low-20s. Any way to think about Q2 within that? Presumably, Q2 is going to be significantly worse than that. But how are you thinking about just how far Q2 could fall before we presumably work our way back up in the back half of the year?

Yes. James, I guess I will take that. When I think about it, if you look at March as a kind of a benchmark, March SSI down mid teens. Assuming the trends and some of the factors that affected March are more prevalent throughout the course of the month of April, the way I think about it is, is that it's quite possible that April will look more like two times the reduction that we saw in March. But that's very much of a guess on my part. And I think a lot of what we are seeing is very much of a leading indicator, which should start to benefit, I think, May and June. And just I think everybody needs to be careful with all of the disruptions associated with shelter at home. There's got to be some impact on the registration process. So I would expect that reporting to be extremely choppy in the next month or two.

But just to be clear and I apologize. But just to be clear, if I am thinking about first quarter being pretty flat and then April being down, call it, 20%, it sounds like to get to 20% for the year, you wouldn't be factoring in any improvement during the remainder of the year from a retail perspective. Am I thinking about that the wrong way?

I think you have to factor in the dynamics of March with half of the states reporting, James, were down mid teens. There's another half of the states that are likely going to trend the same way. So I think with March being flat right now, in all likelihood when it gets revised, it's going to be revised lower, would be my guess.

And the quarter was flat.

And the quarter was flat.

But March was down, as Bill said, mid teens. So that if you double that, that doubling of the mid teens down is what we think April would look like.

I see. And then things presumably getting somewhat better from there?

Correct.

Correct.

Got it. Okay. Thanks guys.

Thanks James.

Thank you. Our next question comes from Joe Altobello with Raymond James. You may proceed with your question.

Thanks. Hi guys. Not to kind of hone in on your dealer base and maybe the health of your dealers. I mean, obviously MarineMax being your largest. But beyond that, some of the more smaller dealers that you sell through, any sense for how their financials are looking and how their liquidity situation is looking?

I think we are broadly in pretty good shape. We have still extremely low levels of concern, I would say. And dealer sentiment is certainly, over the last week or two weeks trending more positive. I think that more recently we are seeing kind of mid-80% of dealerships open. Many, many dealers have maintained service and maintenance operations, kind of curbside pickup, online sales and those kind of things. So I would say, Bill, a comment from you, but broadly pretty low.

Yes. So we spent quite a bit of time looking at that, especially at times like this, Joe. And things like inventory levels, mix of inventory that dealers own, the actions taken to defer interest payments and curtailment payments are obviously very helpful from a liquidity perspective. Most dealers, especially smaller dealers, have applied for government assistance which I think is helpful. Remember that service and getting boats on the water and having boating activity resume in some form or fashion is extremely helpful to most of these dealers. And the fact that we are starting to see some uptick in what I would call leading indicators is also very helpful.

Got it. Okay. And secondly, in terms of the OpEx issue, you mentioned the $525 million, $550 million. I think that's down probably $75 million, $80 million from what you originally had planned. How much of that $75 million to $80 million is structural do you think? And how much of that comes back next year, if hopefully we are in a better environment?

Yes. I don't know if I would give you an exact number, Joe. I would say a portion of it is definitely structural. I think as a company and what you have seen from us is, we try to make things stick as much as we can. Obviously, there are some trends here that are very kind of localized around the production disruptions and stuff. But we are working to try and make sure that we continue the process of leaning out our cost base, although I wouldn't give you a number right now.

Thank you. Our next question comes from Scott Stember with C.L. King. You may proceed with your question.

Thanks guys for taking my questions. Can you maybe talk about as you are ramping back up in April and May, I guess the capacity that you are ramping back up to at, least in the near term compared to where you were before COVID, just to try to get a sense of how things are ramping up?

Yes. Sure. So on the engine side, we began to ramp up a couple of weeks ago and the first place we started was the production line that produces our newest platform, the 175 through 300 and the 450 racing engine. That was the area where we have consistently had the highest demand and where our inventory levels have got to the lowest point. We have now restarted the 400, 450 horsepower line and then we will progressively introduce other lines. I think, obviously, we are managing this to make sure that all of our new protocols for health and safety work and we are progressively ramping up. But we feel that we are ramping up in a way that allows us to protect the upside here, even though we are being progressive. On the boat side, I would say one of the things we didn't really talk about is, when we shut down operations fairly abruptly on March 23, we trapped a lot of retail sold boats on the production line. And we worked diligently during the interim period prior to the restart to rerack our production and make sure that we prioritize getting those retail sold boats off the line as soon as we restarted. So I would say we are in a good position of being able to restart with quite a significant portion of Q2 already covered by retail sold boats. So that is allowing us to be progressive, but to ramp up relatively quickly. So for example, at Boston Whaler, as far as I know right now, every production line is up. So that might not be the case everywhere, certainly the places that have restarted more recently. But I would say that we are balancing, making sure that everything is, - supply base is good, that the health and safety protocols work. But the good news is that we do have quite a lot of retail sold product that we can prioritize in the next several months.

Okay. And with regards to the financial arm that you guys have, you talked about, I guess, offering curtailments to some of the dealers. Maybe just talk about the expected impact and maybe just frame this, what your loss experiences were back during the financial crisis and what you would expect this time around?

Yes. Scott, I will take that. Loss experience was actually pretty manageable on repurchases, but for one large dealer that we had an issue with. It was a high single, low double digit sort of number for a couple of years. And I would say that entering this crisis, we are much better positioned from an inventory perspective, a mix of inventory perspective and just general health of dealers. I think dealers, as a lot, every cycle gain a little bit more experience. They get a little bit more conservative. And I think in total, industry-wide, we just get more disciplined. And I think that that is going to be very helpful depending upon how long we need to deal with some sort of a demand shortfall year-over-year and I think we are pretty well equipped for that. The curtailment payments are really just putting in place something that allow a dealer to pay against a boat when it's sold as opposed to collecting principal before it's sold. And the objective here is to try to give dealers another couple of months of selling existing products and we are really talking about model year 2019 products. So it's a fairly small percentage of product that dealers have on their lots that's subjected to this. That gives them a little bit of a liquidity relief at a time when they probably need it the most. And the same with interest, deferring the payment of interest until the boats associated with the interest cost actually gets sold and the cash gets generated so they can pay up the interest obligation and the boat obligation.

Thank you. Our next question comes from Craig Kennison with Baird. You may proceed with your question.

Good morning. Thanks for taking my questions as well and for taking a shot at framing 2020, despite all these uncertainties. It's nice to see the portfolio performing as it was designed as we face another downturn. And to that end, I am curious if you have any visibility into boat usage. I know in some markets, there are marinas that are closed. In others, boating might be one of the few recreational options available to people. So how do you net all of that together to think through what boating hours might accumulate this year?

Hi Craig, it's Dave. I don't know if I could net it all out to boating hours. I would say where boating is allowed, usage is really strong. And we have seen that in a number of places. But it's been interesting with Freedom Boat Club. We have a bit more access to the consumer and people who want to go boating. I think our membership growth in the last week was I think close to double what it has been over the same period last year. So clearly, people are really desirous to get out on the water. We have had a lot of excitement around reopening of Freedom. And then people in Florida, particularly, I think boating has been strong, continues to be strong. So I would say as soon as the stay at home orders are lifted, there are some places are subjectively, we subjectively believe that people are going to want to get out.

There seems to be an awful lot of noise in places where people are precluded from boating, people wanting to get out on the water because they view it as being a safe activity and something that they want to be able to do.

It was interesting, just a little anecdote. We were talking earlier, one of the staff members was saying and I think this is pretty common because we have heard that with school and college sports essentially not happening through probably spring and summer and with the prospect of not taking international vacations, then people, I think a number of people have decided to buy the boat that allows them to recreate and maintain distancing, which is favorable for us, obviously, as an industry.

Great. Thank you.

Thank you. Our next question comes from Tim Conder with Wells Fargo. You may proceed with your question.

Dave, thank you for that last comment. We are hearing some of the same things too. If you are not taking the destination vacation, maybe you save on commuting or eating out or whatever people are looking to do, some power sports related things, including boating. So no, thank you for confirming that. Back to the original question asked by James on framing the market. Roughly 60% of the units of the market roughly is aluminum-related boats. So I guess my real question there is in your down high teens, low-20s outlook, is there any color within that, better or worse, if you look at aluminum versus saltwater fishing versus other fiberglass? Any color you could give there? And then you talked a little bit already about the outboard engine expectations. Where are you seeing those large horsepower gains? Is it domestic? Is it international? Balanced? And is this a time right now where you can kind of put the pedal down and really accelerate that through this downturn? Do you feel in good position to do that?

Yes. So maybe I will take the last part of the question first on high horsepower. Yes, we are seeing market share gains domestically and internationally. And through the first quarter, I would say, I would characterize them as substantial. Yes, the team at Mercury is absolutely not taking their foot off the pedal and we do see opportunity here. So yes, it remains absolutely a priority. They do have, as you know, the capacity to service all their channels now. And it was no coincidence that's the first line that we had to bring back, our first two lines that we had to bring back up were our high horsepower product lines, where inventory had already dropped to relatively low levels. So yes, domestic and international. We have seen particular strength internationally in Asia, a lot of commercial applications, but domestically as well. I don't know if when we were calculating, back to your first part of your question, when we are estimating the market, I don't know if we get tremendous fidelity around aluminum or fiberglass.

I mean, I think we feel pretty good about our fiberglass categories, especially Boston Whaler, with the new product launches and favorable comparisons over the remainder of the year. I think that's a place where we are going to see some nice growth.

We saw a spike in interest in sea rates.

Yes. And sea rates. And I would characterize, if you think about the way we have talked about outboard share gains, saltwater, repower and commercial, all thee of those are driving share gains. So it is unfolding the way we thought it would.

Thank you. Our next question comes from Gerrick Johnson with BMO Capital Markets. You may proceed with your question.

Great. Thank you. Good morning. Sticking with Mercury here. I was wondering what your order book looks like from the OEMs you supply to? And then you sold more dollars worth of outboards this quarter than boats. So can we talk about maybe the inventory pipeline out there for engines?

I will start with the pipeline. We monitor pipelines just as much as we monitor everything else. And we are not materially disconnected between the two, Gerrick. I think we are in pretty good shape in both and very comfortable with both. I think a lot of it has to do with maybe to our view of trailing versus forward, the fact that we have had more growth in outboard sales portends to kind of what the forward opportunity is at retail. If there is any sort of pipeline growth is there, it's more about what our opportunity is moving forward at retail versus kind of what I would refer to be a disconnect. And the order books, we are obviously, everybody in the industry is ramping up at the same pace that we are. And order books are building just like we would expect them to, consistent with the way we see production and everything unfolding here in the second quarter.

Okay. Great. Thanks. And one last one from me. If you took the end of March and then April together, where are you seeing geographic performance? Are you seeing certain geographies do better than others and primarily U.S.?

OUS.

I am not sure we have gotten that granular. When I looked at March, it looked to be pretty consistent across the board, at least the states that had reported, Gerrick. It has to be influenced by where there's been restrictions in place and where dealers have been allowed to operate. I think when we get a hold of April retail and full March, those things are going to correlate pretty well. I will say that boating activity tends to be centered around places where there aren't major concentrations of population. So I think as I think about people's willingness and ability to boat, I think that's going to be interesting to see how that plays out in some of the SSI data over the next two or three months to see just how much those areas have outperformed areas where restrictions have been the greatest.

Yes. I would also say that a lot of the big boating areas are likely to relax restrictions somewhat faster, I think. Although we were really pleased that the New York, New Jersey area opened marinas several weeks ago. So in areas where boating is a significant part of the economy, I think we are seeing good progress.

Thank you. Our next question comes from Mike Swartz with SunTrust. You may proceed with your question.

Yes. Hi. Good morning guys. Bill, maybe to start off with just the commentary around operating deleverage and your outlook there, I think you said mid-20s, mid-30s. And historically, I think you have said over time that should trend more in the low-20s to mid-20s. So maybe what's the disconnect there? And maybe frame what the maybe lower end of the range means versus the higher end of the range? Is it all product mix? Or how should we think about that?

Yes. So if you think about it, the $25 million to $35 million is essentially kind of the range of what the volume impacts are going to be. If you mix together how boat's P&A and propulsion will all deleverage, it kind of gets you in that 25% to 35% range. The level of cost reductions of $50 million to $75 million is kind of what we are able to do and flex in response to the volume reduction. It's really the other operating factors. And I would say the biggest one there is just absorption. With production shutdowns and pulling down inventories a little bit, we are producing, especially in propulsion, kind of below where the sales rate is for some period of time. And that carries with it a little bit of extra under absorption on fixed cost and that's probably the headwind that we would normally kind of be trading off volume against op expense. The headwinds that we are facing in that operating factor column are a little bit greater than what we normally anticipate. And not necessarily things, Michael, that I would consider to be all kind of run rate factors either. So I am pretty comfortable with where we are delivering. I think we are balancing out all three about the same. And the volume reduction is a fairly significant volume reduction. And with a portfolio that's delevering at 25% to 35%, you really have to do a lot on the cost side to offset that. And quite frankly, I think, we are in a period where we ought to still continue to play a little offense instead of just playing defense. And the fact that we are maintaining R&D at $120 million, $130 million worth of spend and maintaining all of our critical products is a decision we can make because our financial position allows us to and it maintains all the optionality on growth that we expected in our last three-year plan. So I think all of that stuff is very important and it's just trade-offs.

Thank you. At this time, I would like to turn the call back to Dave for some concluding remarks.

Well, thank you very much all of you for attending the earnings call. I think as you can see, in the face of the challenges presented by COVID-19, our company is responding decisively with additional actions, but you can particularly see the benefits of the changes we made to our business model and our portfolio and our cost structure and our capital strategy and our product investments over the last few years. We are certainly encouraged by the trajectory of the leading indicators in the boat market, but we are maintaining a lot of flexibility as we go forward. So we have the same great strategy. We have the same great team. We are continuing to invest in new products and technologies and digital initiatives, which will carry us into the future and we will be even more formidable coming out of this than we were going in. Thank you all very much.

Thanks everybody.

Thanks everyone.

Stay safe.

Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.