Good morning and welcome to Brunswick Corporation's Third Quarter 2020 Earnings Conference Call. All participants will be in a listen only to the question and answer period. Today's meeting will be recorded. If you have any objections, you may disconnect. At this time, I would not like to introduce Chris Dekker, Vice President, General Counsel and Corporate Secretary.

Good morning and thank you for joining us with me on the call this morning, hour, Dave Foulkes Brunswick's CEO and Ryan Gwillim, 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 Dotcom. During our presentation, we will be referring to certain non-GAAP financial information Reconciliation's of GAF 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, Chris, and good morning, everyone. Each of our businesses delivered outstanding operating results in the third quarter. Our ability to capitalize on very robust retail demand, which was enhanced by expanded voting participation and our compelling portfolio industry leading brands drove excellent financial performance and value for our shareholders. The power of our platform and our investments in operational excellence were on full display as we accelerated production levels to both meet retail demand, which continues to be elevated even as we exit the primary selling season in the US and begin the process of replenishing historically low pipeline inventory levels are extraordinarily strong. Free cash flow generation provides us with the flexibility to execute our capital strategy, which among other things, encompasses our planned investments and growth initiatives, including new products, advancing our ACS strategy and maximizing the reach of freedom bookclub. Our propulsion business continues to gain appreciable retail market share, particularly in higher horsepower categories, as a direct result of our product leadership efforts and has yielded many new OEM customers a new dealer relationships. Throughout the year, our parts and accessories business delivered significant topline and earnings growth has increased both in participation and favorable weather, which extended the voting season in the US, drove strong aftermarket sales, while OEM production ramp ups across the industry also created high demand for our full range of OEM systems and services, our premium brands remain market leaders in their categories, and our value brands offered attractive entry points to new and returning for the voters. The surge in retail demand resulted in historically low pipelined inventory levels, with only 14 weeks of inventory on hand of 48 % fewer votes in dealer inventory at the end of the third quarter 2020 versus the end of the third…

What about the retail demand? Together with late stalled late season, both usage had a material impact on our financial results in the quarter, making for significantly better year over year comparisons. Net sales in the quarter were up 26%, while operating earnings on an adjusted basis increased by 49% adjusted operating margins, or sixteen point 5%, up 260 basis points versus third quarter twenty nineteen. And we finished the quarter with an adjusted EPS yet of a dollar eighty, up 64% from prior year. We generated three hundred and ninety six million dollars of free cash flow in the quarter. This outstanding outcome is driven by strong earnings and favorable changes in working capital, resulting from reductions in inventory and increases in accounts payable from increased production, as well as a seasonal reduction in accounts receivable. On a year to date basis, net sales are flat versus twenty nineteen and adjusted operating earnings were down two %, adjusted operating margins of 30.6%, which are just 20 basis points lower than the same period in twenty eighteen is a very good result, considering the challenges faced by the businesses in the first half of the year with having to shut down, then ramp up production as a result of the pandemic. I will now discuss the third quarter performance on a segment level, starting with the propulsion segment, revenue increased 33% as each product category experienced strong demand, especially in higher horsepower outboard engine categories and related controls and systems. All customer channels showed growth in the quarter as OEM customers continued to ramp up production and increase capacity, enabled elevated sales to the dealer and international channels. Operating margins and operating earnings were up significantly in the quarter as a result of increased sales and favorable changes in sales…

Thanks, Ryan. 2020 has presented many challenges. Our businesses are executing extremely well against our operating and strategic priorities. In the propulsion segment, we continue to leverage the strongest product line up in the industry to gain market share in the parts of the market where we've been historically underrepresented of further growth into Salt-Water. Repower international commercial markets is being enabled by the manufacturing capacity added in 2018 and 2019 and will be bolstered by exciting new product launches in the coming months. Finally, with lower engine inventory levels across the globe, we continue to increase production in an efficient manner to refill the pipeline and the segment. We anticipate steady demand, aftermarket parts and accessories as both is complete and the season servicing in northern markets. We also expect demand to remain high for our OEM product lines and integration services as both builders continue to ramp up production to replenish pipelines ahead of the 2021 retail season. In our Boat segment, we will continue to focus on launching new products across the portfolio, including some new products designed for younger voters, ramping up production to meet demand and result pipelines and making progress. With our stated plan to further improve operating margins, Bookclub continues to expand and execute against this strategic growth objectives. We've added over 30 locations thus far and 2020 with franchisee demand for products peaking well ahead of anticipated levels. We're making rapid progress with our enterprise wide initiatives in digital marketing, ecommerce, consumer insights and data analytics, while also driving our ACS strategy forward. One recent example of our ACS investments is our Freundlich partnership with the marine autonomy company Sea Machines, in which we announced yesterday an additional investment aimed at advancing autonomous piloting for marine vessels progress's. These initiatives will be…

Thank you. Ladies and gentlemen. [Operator instructions] And the first question comes from the line of James Hardiman, Wedbush Securities. Hey, good morning, guys.

So I'm going to ask sort of a weird question, but bear with me here. I mean, I've been covering you guys for the better part of well, I don't know myself, but a big part of I think analyzing the business and certainly managing the business has been just understanding the cycle right. And we find ourselves in a in a situation where we're in the midst of a recession and yet the industry is going to be up high single digits. So my question is, as we look to 2021, should we be thinking about that is as the first year of an economic recovery or the eleventh year? I think most industry observers had sort of resigned to the fact that maybe we'd get to, you know, 200000 units at the peak of a cycle or maybe a little bit better. And that was about it. I'm curious how you think about the long term potential from an industry perspective and whether or not anything has changed and how you're sort of cycle thought inform your capital strategy, right. Sitting on, $600 million in cash, $600 million free cash flow. Obviously, the way you think about the next few years is going to inform, you know, what you invest in. So sort of a big picture question there, but any thoughts would be welcome.

Thanks very much. To speak big your question, but thank you for thank you for asking it. I think, obviously this year is has some unusual trends in it, but we intend to fully capitalize on those trends in a way that I think will influence our business for many years to come. It is clear that we are overinvesting of new voters and diverse voters versus the industry, and we will be working hard to retain those new voters and indeed in next year and the year beyond. Make sure that additional people join, I believe, as a potential network effect here, which will be expanded. If you think about this year, we have all these new voters and returning lapsed voters. But that really that decision time was very short. They had to decide between essentially April when we were in the depths of the first stage of the pandemic, whether they were going to suddenly buy a boat. I think given the amount of publicity around boating and the safety and utility and enjoyment. I believe that there will be many more people making longer term decisions that will support us for a number of years to come. In terms of the way we kind of think about the business right now, I think we've made it clear today that we're in the middle of a multi-year effect from a wholesale perspective, as Ryan mentioned earlier, even producing at historically high levels. We will not make significant progress in increasing the pipeline in 2021. So we believe that the wholesale drivers here are multi-year wholesale drivers. I would tell you that when we talked about our reference strategy here, it is a reference strategy. I would say it's a cautious strategy. Every leading indicator that we have points to much more robust retail demand, but we don't know exactly what we don't know right now. And so we thought we would offer the strategy that presents the business in a way, a kind of a kind of neutral market way. How would how would we do in a neutral market the way that we generated cash this year certainly puts us in a I think, a strong position to accelerate some of our growth investments, whether those are organic or potentially inorganic, and positioned ourselves extremely well for a range of scenarios, probably more quickly than we would have anticipated just a few months ago or even a year ago. So I think we find new energy in the business right now around the retail demand and wholesale demand. And our objectives are to capitalize on that, not just in the short term, but also in the long term.

Thank you. Your next question comes from the line of Scott Stember would see. OK.

My main course is just on the credit worthiness of the people that you have come here. And obviously we're in the early stages of a potentially multi-year cycle here of a lot, much younger consumers coming into this market. Could you give us any additional color on you know what the I know they're younger, as you mentioned before, about the income level and the credit worthiness and give us some comfort that we won't have some issues potentially down the road.

Yes. God, this is where we've actually been tracking this, obviously, through our blew out of retail finance organization. And we are not seeing any major changes or shifts in the credit worthiness of the potential buyers. So, you know, interest rates remain low, financing remains very available. And to today, we have not seen any market shift.

Thank you. Next question comes from the line of Craig Kennison with Baird.

Hey, good morning. Thanks for taking my question. I hope it's different than what I just heard, but wanted to really understand mercury in the market share trends better. I know you've had the Evinrude when you've also had OEM wins with sportsmen and Bennetto. I guess I'm wondering if you can help us understand or quantify really the share gains that you've seen and then help us understand what's driving. And it feels like it's been a huge year in terms of market share wins. And I'm guessing maybe some of your OEM partners are getting a peek at what your future innovation looks like. But just want to understand those trends better.

Thank you. Great to hear from you of the market share gains significant and we, as we said earlier in the year, that we are already training ahead about twenty, twenty two objectives, which were part of our Miami presentation. So clearly, Mercury is accelerating even faster than we had anticipated. I think we clearly have the best product lineup in the marketplace. And I'm very excited about what is frankly just around the corner as well, which I think will expand that leadership. But I would say, though, that Mercury is a very, very reliable partner and it's important for our customers not just to have the best product, but be able to get it reliably. And so the investments that we've made over recent years and also the level of partnership that we demonstrate I think is superior to our competition. These winds don't just come overnight. They come after long periods of investment in terms of relationship building, as well as displaying the benefits of our new technology. I would say that you mentioned some of the bigger wins, but just over the past year, we have 44 zero new OEM customers. So you can tell how fast this is happening and we are well positioned to capitalize on that. Trend is very significant and it has a lot of momentum in it.

And then, Craig, I would also add to that that we still have areas including repower international markets and Salt-Water, where we still are under indexed to our US share. So there is still runway to go, ample runway to go on the on the share gain. So it's not a we're not close to the finish line there. There's still work to be done. And as they said, with the best products in the industry and more to come, we're excited to go out and tackle that.

Thanks. And since James open the door on these big picture questions, I'll slip one in here. Your new president of the Bolt group has an automotive background, including work in this AIDS field. And I know you just made that investment in Syria and see machine robotics. To what extent are we on the cusp of some significant revolution in kind of the operations of a boat? Is that something that's overstating it?

I would say that there is significant progress in a lot of the same areas of technology that you will see in other verticals. We do have a difficult and different use case in a boat, but nevertheless, these things are going to be more material to our business in the next several years. And so we need to position ourselves with the right talent to be able to fully capitalize on that and differentiate ourselves. Our new president on January is indeed most recently from that field of electronics and but other systems. However, she has a long history in operational excellence, strategy and product development, in addition, which I think will equip her to run that business in a very, very contemporary way. In addition to advancing the technology suite in a way that I think differentiate will differentiate our product lines.

Thank you. Next question comes from the line of Eric Wold with B. Riley Securities.

A couple of questions around M&A as you think about the, you know, the increased comfort you now have with the 2020 to financial targets back in February. Are you are you seeing an easier path getting there without acquisitions, or is the assumed M&A contribution the same as it was back when you first gave those targets? And then you think about the acquisition opportunities out there, you know, have you seen any change with the recent surge around, you know, the number of opportunities, expectations becoming elevated? And does this change your view of potentially, you know, increasing further in the boat category itself, or is that something you're still somewhat against?

We still have a very active M&A funnel. So we are proceeding as we, as we've previously indicated, looking at organic growth opportunities. And we continue to focus the majority of our efforts exactly as we indicated, which is then kind of play annuity orientated businesses, service businesses like freedom, et cetera. So I'll kind of bull's eye, if you like, has not really changed for 2021 of the purposes of simplicity. We did not include any inorganic growth opportunities, but we remain very actively looking in that area and we do indeed see a number of interesting opportunities.

Thank you. Next question comes from the line of Joe Altobello with Raymond James.

So I guess the first question, this is probably a hard number to tease out, but within that high single digit U.S. retail industry growth you guys are looking for this year. How much of that do you think is coming from the unusually high number of new and last voters this year versus what we would see in a normal year? I'm just trying to quantify maybe what the COVID tailwind, the lack of a better term is for this year.

Yes, it's a good question. So I think I think in the middle of the year, we had we definitely had a significant contribution from new and lapsed voters. I would say that we do believe, though, that because of somewhat constrained inventory, they probably displaced more traditional voters who would have in other circumstances, probably upgraded their vote this year. So given the inventory constraints, it is a little difficult to kind of understand exactly what the dynamics of that effect would look like in eight years. I think it is possible next year that we'll be seeing similar levels of influx of new voters and people who wanted to wanted to upgrade this year but didn't have an opportunity to of reentering the market as well. So there's no great answer to your question. But in a supply constrained environment, which we kind of around right now, it's difficult to know that.

I understand. And I guess, secondly, Virion, you did some really good numbers. It's a really good color on units and pipeline we built for two thousand twenty one. I'm curious what you're seeing on the home front. I mean, obviously, Weller and Seawright are selling very nicely and tend to be higher priced. So, yes, I know what next year as well on the book.

Yeah. Joe, as we do continue to climb in, even in light of a little bit more strength on our value product this year, I think people putting more content on their product up and down the line of whether it's value or premium is really driving that. So, yes, I would tell you that probably some tailwinds there also, combined with the fact that some of our more premium brands, such as whalers, specifically have new product line up, a new product that is ramping now and probably we'll see a little bit more retail next year as opposed to what they did this year. So I would say yes on your ASP question, maybe just a bit.

I just don't this helps. But we're only a day into the Fort Lauderdale boat show, but we're already seeing sales from the first day of whaler's ahead of last year, even with the extended delivery times that we would now be closing. So it is clear that there are people who may be delayed that purchases this year and are now thinking, I better get in the queue, otherwise I'm not going to get anything right.

Okay. Thank you. Thanks, Joe.

Thank you. Your next question comes from the line of Gerrick Johnson with BMO Capital Markets.

I think one of the things you see, David, when you address 2021 guidance you mentioned have more clarity and clarity where all the drivers you didn't mention clarity on supply cost like that. And if you could talk about that part of the equation, that is your guidance for twenty, twenty one, anticipate new capacity. And what level of capacity utilization will you be at to achieve or. Twenty, twenty, twenty, twenty one numbers.

Thank you. I think maybe answer in the last night does not anticipate any new capacity. It does not anticipate any bricks and mortar. There may be some local, you know, the smaller things that we need to do. But given the demand, we are certainly looking at not really a lot of bricks and mortar, but other ways to potentially increase capacity. And we're actively studying that right now on the cost side. We're certainly seeing a little more pressure from suppliers who are constrained at the moment, probably by their own internal capacity and may be experiencing kind of due to pressures as well at the moment. I would say on the cost side from on the supply chain side, it doesn't look like anything that we couldn't contain or very largely contain. Our ability to ramp up is it's been very good. And I think we've been hiring a lot of people. We hired 900 people across the operation in Q3, 900 production workers in Q3. We're still hiring pretty successfully. But certainly as we go through the dynamics of corporate in the different states, you know, we see different levels of absenteeism that we have to compensate for. So the 2021 forecast is really a no new major capacity actions, assuming that we can continue at reasonable levels of operational ramp up. And in that scenario, as Ryan mentioned, we don't really put a big dent in the in the in oh, we've been unable to recover a lot of pipeline. Obviously, that is not that is less than we really would like to do ideally. So we are certainly studying ways in which we could ramp up faster, but it would not material materially impact our footprint.

Okay and then right now your inventory is down twenty, twenty seven % year over year. It looks like you'll have to follow a lot of materials in the next couple of months to hit that sales guidance. So given the state of supply chains, how confident are you in being able to achieve revenue growth of, what, 13 to 15 %, I guess?

Well, so far, we're very actively managing and monitoring our supply chain. We I would say that although we were experiencing issues that we need to manage on a daily basis, nothing is really slowing us down. So, you know, it's possible that that will happen. But that is not the current situation. I think we're all managing our way through the through the corporate environment as best we can, both us and our suppliers. And so far, we've managed to do that. So essentially, we well, we have short term shortages. We manage that. I can't see exactly what might happen in the next year. But obviously, if there's a major disruption that's going to impact those. Right now, we seem to be managing Okay and I believe that we can ramp up as we need to deliver the 2020 forecast.

Thank you. And our next question comes from the line of Mike Swartz with Truist.

Good morning, guys. Mike 2020 guidance range you can help us with this. So the operating leverage for fourth quarter, third quarter. So I don't see a lot of change in terms of what I'm talking about. Strong demand they sent for us. So I guess why should we expect that step down between the third quarter in the fourth quarter?

Yeah, thanks, Mike. And then this is something we obviously anticipated coming into the call. The third quarter is quite strong, really at the gross margin line. We had very favorable mix in propulsion and really throughout some of the Pinay categories as well, and also some lower retail discount in the bulk group, as you would imagine, given the state of play in the retail market. Also, OpEx was down in the quarter, obviously up as a percentage of stronger sales and frankly, just operating efficiency across the board, benefiting from the cost takeout measures that we did in 2019 and earlier this year. And then when you look to the fourth quarter, they're still going to be some benefits on the gross margin line, probably a bit muted, a little bit more muted due to the smaller sales increase that we're anticipating makes that up. It probably would continue a little bit, but not quite to the same extent. I remember we've got some seasonality in there, obviously with lower sales projected and propulsion and pinay just due to the usual course of play and then on OpEx in the fourth quarter and a couple of things. There's a little bit more R&D expense coming out of mercury, which I think most people will say that's a good thing. That means good things on the horizon and a little bit more variable comp that is associated with our better performance. So, you know, it's not a it's not a big number. Obviously, with the fourth quarter, leverage is still within our usual cadence between high teens and low 20s goal above. You know, a couple of things swaying a little bit in the fourth.

The second question, just more philosophical level, I guess, given the amount of visibility you have given the liquidity you have, how does it change when you think about financial leverage in the business over the next several years?

Yeah, they might you know, we obviously are going to end up in a position at the end of the year, which is where we strive to be one and a half times. I assume you mean our financial leverage from a debt capacity standpoint? Yeah, we're going to we're going to be in a good place, obviously, by the end of the year. And as we continue to pay down our term loan debt, that number is going to get closer to one time. And all that does is enabled us to ramp up as needed for a large investment, whether it's product or M&A or the like. I think we've shown with the power products deal that we are able to leverage up and will for the right deal. And, you know, the rating agencies seem to be OK with that, given that we you know, these are good mergers and acquisitions, deals and good assets out there. So we are we are OK leveraging up for the right asset, but, you know, continue to work it down over time. I think given the nature of what we do in our industry, I think keeping it, you know, two times that lower or really one and a half times lower will still remain. Our will still remain our goal.

The next question comes from the line of Brett Andress with KeyBanc Capital Markets.

Hey, good morning. I may have missed this, but how much of your boat production flops have a customer name on it? Or is retail sold at this point versus maybe how much is allocated to the dealer restocking?

Yeah, we really don't give that exact number, but I would tell you, it's you know, it's less than it's less than half, but it's more than usual this time of year.

Okay. I met on five twenty five where you talk about the 21 EPS Bridge, just a question on the smaller Pinay contribution in that slide. I mean, what are the underlying assumptions there? And, you know, that underwriting boat usage or restocking next year versus the other segments?

Yeah, this is another one we anticipated. Pretty, pretty straightforward. Just because it comes out a little bit on the chart, then this shouldn't be surprising because this is a more steady grower, more annuity based. You know, it grows a little bit with inflation, plus some market share gains and other things in the OEM business. I think, you know, we had a very strong we're having a very strong second half in that business. You saw the revenue gains in the in the third quarter. I think if you take our guide for the fourth quarter, that includes some pretty strong growth there as well. So that's a business that's able to kind of restock a little bit more continuously, whereas engines and boats, it takes a little bit of time to refill, refill the pipeline. I would note. Obviously, that segment, as they've mentioned, is one where Havanas is where, you know, where one area where we're targeting that description does not include M&A on that page or in the 75 to 76. So there's probably a little bit of, you know, maybe a little bit of conservatism there. But this is a fantastic business that really elevates our earnings floor in any economy, in any marketplace as shown by its performance in the second quarter this year when, you know, essentially the world, the world's stock for two months.

Thank you. And our next question comes from the line of Shawn Collins with Citigroup.

Great. Hey, David, Ryan and Brant, good afternoon, so to speak, with you so much. My question is on margins and specifically margins, the about segment top line trends are obviously quite healthy. But in addition, your operating margin really came in at what I believe is a record margin of nine point two %. I know you have done a lot of hard work around cost realignment and restructurings. I wanted to ask you to some margin and a level of profitability that you think is sustainable in the future. Thank you.

Thank you for the question. Yeah, we certainly believe it's sustainable and we certainly plan to grow that even further. I think we obviously in the third quarter and fourth quarter are benefiting from volume, but we're also working through ramping up onboarding people, training people and having some inefficiencies in that process. So I think our strategic actions in the group are flowing through nicely cost reductions, organizational consolidation, in addition to the strong product line and some of the new products coming through. But we have room to run on those margins, both on the efficiency side and I think on the gross margin side as well. So we're I think that this is a great a great trend. Very glad to see it. But expect more.

That's great. Thank you, David. Maybe just a quick second question on supply chain. I know you just touched upon it to some extent already, but we certainly hear get a lot of questions on this subject. As Ryan accurately said, the world stopped for two months and then it restarted all at the same time. And that's created some logjam. Can you just talk about some specific areas where you've seen more challenges and where you're putting a little bit more of your time to obviously successfully navigate any supply chain concerns there? Thanks.

I think that we have the benefit of a, you know, a propulsion supplier that from Mercury that invested tremendous tremendously in capacity and efficiency and continue to invest there. So I think all of Mercury's customers uniformly are benefiting from not only Mercury's great products, but it's a tremendous investment and capacity. And so that takes that issue off the table that other people might be experiencing. I would say that. As we go through the various ways of COVID, it affects different states and even different countries somewhat differently. So, for example, Mexico, the northern states and Mexico, where a lot of wiring harnesses and other electrical systems are developed, I've experienced some ups and downs, although right now that area is producing very well. So I would not isolate any specific kind of subsystem as an issue. I would just say that we are continuing to manage and are working extremely well with our supplier partners and we're very thankful for all the efforts that they're putting in. There is nothing right now that is rises to the kind of area of holding the business back.

I understand that is helpful. Thank you for the time and insight.

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

Well, thank you all very much for attending today. And thank you all for the wonderful questions. As you've heard, it's been in some ways a challenging year for all of us, including our employees. But our whole team is very, very excited about the energy in the marine market. We believe we have a unique platform and our investments in products and technology and capacity position as exceptionally well to capitalize on the situation of all of our retail and wholesale. Leading indicators suggest this is a multi-year and very robust prospect. I'd like to close by personally thanking outgoing chairman Manny Fernandez for his tremendous partnership over the last two years and wish him every success in the future. I know we'll stay closely in touch and by warmly welcoming Nancy Cooper of our new board Chair and Reggie Feltham as a great new board member. Thank you all very much.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program and you may all disconnect.