Good morning and welcome to Brunswick Corporation's Fourth Quarter and Full Year 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 Brent Dahl, Vice President- Investor Relations. Sir, please go ahead.

Good morning and thank you for joining us. With me on the call this morning are 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.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 consolidated financial statements accompanying today's results. I will now turn the call over to Dave.

Thanks, Brent, and good morning, everybody. Our businesses executed extremely well against our operating and strategic priorities in 2020, demonstrating the strength and resilience of our marine-focused portfolio. Despite the many challenges faced in 2020, including the significant disruptions to our global operations during the first-half of the year due to the global pandemic, we expanded gross and operating margins, delivered an eleventh consecutive year of adjusted EPS growth, and generated record free cash flow. The transformational changes we have made to our business in recent years have reinforced our position as the market leader in the marine industry, and have positioned us to meet or exceed our strategic plan financial targets. Our Propulsion business continues to deliver outstanding top line and earnings growth, outperforming the market by leveraging the strongest product lineup in the industry, and accelerating penetration into saltwater, repower and international commercial markets. Our Parts and Accessories businesses delivered strong top line growth and robust operating margins as a result of increased boating participation, which shows strong aftermarket sales, together with high demand for our full range of OEM systems and services as bulk production increased during the second half of the year across the industry. Within our Boat business, all brands contributed to the revenue and earnings growth over the second half of 2020 as U.S Marine retail demand continued to surge through year end. Our premium boat brands remain the market leaders in that categories with a series of significant new product launches underway, and our value brands continue to offer attractive entry points to new and returning former boaters. The surge in retail demand resulted in historically low pipeline inventory levels, with 40% fewer boats in dealer inventory at the end of 2020 versus the end of 2019. Finally, Freedom Boat Club exceeded our…

Thanks, Dave. Good morning, everyone. For the full-year, net sales were up 6% and adjusted operating earnings increased by 9%. Adjusted operating margins finished at 13.3%, 40 basis points higher than 2019, which is an outstanding accomplishment by our business units considering the challenges faced by all of our businesses this year during the pandemic. Our operating leverage fell within our targeted range and we finished the year with an adjusted EPS of $5.07, which exceeded our most recent guidance due to the strong fourth quarter performance. 2020 also saw record free cash flow generation, which I'll discuss in a few minutes. To the fourth quarter results, exceptional execution together with continued robust retail demand, accelerating production levels and strong late season boat usage drove outstanding results in the quarter with significantly better year-over-year comparisons. net Sales in the quarter were up 27%, while operating earnings on an as adjusted basis increased by 59%. Adjusted operating margins were 12.5%, up 250 basis points versus the fourth quarter of 2019 and we finish the quarter with an adjusted EPS of $1.32, up 61% from prior year. Now let's talk about fourth quarter performance on a segment level. Starting with the Propulsion segment, revenue increased 33% and each product category experienced strong demand, especially in controls and systems and higher horsepower outboard engine categories. Market share gains and favorable changes in customer mix also contributed to increased revenues. All customer channels show growth in the corner as both manufacturers continue to ramp up production and increase capacity enabled continued elevated sales to the independent OEM, dealer and international channels. Operating margins and operating earnings were up significantly in the quarter as a result of increased sales volumes and the associated favorable factory absorption from the increased production, partially offset by favorable --…

Thanks, Ryan. Moving to our outlook by segment, we believe 2021 is setting up to be a fantastic year for all our businesses. As a quick reminder, comparisons will be more favorable during the first half of 2021 when compared to the first half of 2020, but saw significant disruption in our businesses due to the early stages of pandemic. For our Propulsion segment, we anticipate net sales growth for the year to be in the high single to low double-digit percent range, with operating margins up more than 20 basis points versus 2020. While these Propulsion sales increases are extremely strong, the sales increases and our Boat segment will be even more pronounced as Mercury was in a much stronger inventory position heading into the pandemic shutdowns of 2020 and Mercury continue to ship engines through its distribution channels in late March and early April. We expect earnings growth to include margin expansion associated with new product introductions, increased factory absorption from elevated production levels and currency tailwinds, partially offset by regional sales mix, increased tariffs due to volume increases, and some increase in our spending on products technology and other strategic priorities. Our top priority for this segment continues to be satisfying outboard engine demand and expanding market share through the introduction of new products, and continued success in providing industry leading propulsion solutions to new and existing OEM customers. We also anticipate additional margin benefits as we satisfy greater levels of demand in the dealer, repower and international channels. We remain focused on developing new platforms and technology for our engine product lines and related control systems and are investing in exciting new product families that we project will enable top line and earnings growth into the future. Turning to our Parts and Accessories segments, I want…

[Operator Instructions] Your first question comes from the line of Grace Smalley. Your line is open.

Hi, good morning. This is Grace Smalley from J.P. Morgan. Thank you for taking my question. I guess, firstly, on the retail side you now expect U.S industry retail unit worth about low to mid single this year? Could you elaborate on the leading indicators you are seeing in the market report that, including touching on retail trends you've seen to start the year in January. And then Ryan on the wholesale side, could you walk through how many boats you expect to be able to produce and ship both in 2021 and 2022, taking into account your recent capacity expansion announcements. Thank you very much.

Yes. Good morning and thank you for joining us. In terms of retail market mix in 2021, we have a lot of leading indicators that we've been monitoring. As you know, obviously, we're a seasonal business, but through the fall and winter months, we've continued to see elevated levels of retail demand, typically 40% or more above prior year levels. Leading indicators such as retail financing applications, I look recently worth 60%, I think up in the last week or so. So our current expectation is for a continued strength as we go into the year. Potentially a little moderated in some areas by inventory availability, but we expect a strong start to 2021.

And good morning, Grace. I'll make the wholesale question. So as you heard the stats on 2020, the wholesale sold about 28,000 and the retail sold about 38,000. We believe that given our current footprint, we have the capacity in order to produce at wholesale to match retail this year. So you could think that as around 39,000 units, high 38, low 39,000 units, which would represent a low to mid percent increase in the retail market. And then when you start looking at out years it's obviously difficult to forecast, but I would say given all of the work we're doing in our facilities, in addition to the capacity projects that were announced on Monday, we could probably add a couple 1,000 votes at wholesale in each of '22 and then '23. But obviously all of that is contingent on supply chain continue to be strong, us being able to get our hiring needs to produce that amount. And frankly just good operating across a footprint which we anticipate doing.

Thank you very much. Your next question comes from the line of Greg Badishkanian. Your line is open.

Hey guys, it's actually Fred Wightman on for Greg. I'm wondering if you could help us size the opportunity, either in dollars or just sort of anecdotally with those 70 new OEM contracts that you touched on for the engine side. Are any of those really showing up in the reported numbers that we've seen so far? Is that something that we should start to ramp in '21 and then to '22? How should we sort of think about the contribution from those?

Yes, hi, Fred. So I think the -- your point is a good one. Even when we announced those contracts, that's typically the start of the process for us to -- obviously, the customer has to get rid of inventory of previous brands, and then we begin to phase in, typically, the best time to phase in a new propulsion system is model year. So if we announced new relationships, or expanded relationships in the back half of 2020, for example, the full impact is unlikely to occur until the 2020 -- two model year, which would be June of 2021. So I would say that we are not yet seeing the full impact of any of the expanded relationships or new relationships that we announced in the back half of 2020.

And then, Fred, I think I would add, when we set out our 2022 strategic plan, we obviously had in mind that we would be conquesting and getting these new accounts and growing our share with our OEM. So when you see our outlook, some of that is baked in, obviously, but we are doing quite well in our strengthening our relationships with the OEMs.

Great. And then just finally, the -- you guys alluded to some supply chain tightness, a few different times touched on it for the P&A side, some on the outboard side as well. Can you sort of just walk through where you see the biggest disconnect in terms of supply versus demand across the segments, and how you should think about those sort of normalizing as we move through the year. Thank you.

I think what we’re really doing when we talk about supply chain here is recognizing a risk that is to be honest, not manifest itself in a very significant way, which certainly is kind of influencing some of the unknowable portion of how we position our guidance. So we've seen some of the categories that are expanded a lot, like Pontoons that we see a bit of tightness in Pontoon furniture. We have seen some tightness around transportation, obviously, as number of goods from all kinds of sources are being shipped that provides a bit of tightness. I would have to say though, this is a -- us telling you that it's tight. It's not telling you that it's really affecting us materially at this point in time, only that it's more of a risk that we're cognizant of as we expand further going forward.

Great. Thank you.

Your next question comes from the line of Craig Kennison. Your line is open.

Hey, good morning. Thanks for taking my question. I wanted to go back to that capacity expansion in boats and wonder is there a crossover impact on the Engine business or your Parts and Accessory business to the extent, the add capacity in boats, will you need to add a similar amount of capacity in those categories or does it already exist in this system?

No, there is an effect, certainly as we add those additional boats, obviously our brands are a 100%, so is the Mercury and as much of our P&A as possible. If we kind of -- as Ryan mentioned, as we kind of step our way through this, we will have some effect in the back half of 2021 of this additional capacity, and then we expect to add probably a couple of thousand units in 2022 and another couple of thousand. So the -- that will be a material impact that's 10%, probably skewed a little more towards -- because of Boston Whaler a little more towards a strong -- stronger margin boats and higher content. So there is a full stack margin impact there across all of our businesses that we are working on dimensioning.

And Craig just as -- in case this is a follow-up question, we do not need to invest in bricks and mortar at Mercury to cover the additional engines and P&A at this time. That was really handled back in '18 and '19.

That's great. That was a follow-up. And then maybe just then I'll use a different follow-up, which is, dealers are making great money today because of the massive shortage in inventory. Obviously, you want to get back to a more reasonable level of inventory, but has this given you reason to rethink what the optimal level might be of structural inventory once you get back closer to balance?

I think we'll be working with our channel partners to work out exactly what that is, but we certainly are in, at the moment in unusual time, but we have as you know 17 boat brands and I think the last count about 600 models. So keeping inventory for that kind of skew count requires quite a lot of models in the field just so they're all available at some level. So -- and I think at the moment, anybody with inventory is added advantage. So we will certainly not be -- as we look at inventory levels, we will be very careful about not placing our brands at a availability disadvantage in the field. So there maybe -- I think there may be an opportunity to re-look at inventory levels. One of the things that we focused a lot on is the right inventory. So we work much more closely with our channel partners now to help them understand what is selling, both in terms of models and option content, so they don't get left with slow-moving inventory. And so that is a way in which we can be more efficient, but still have the right number of models available in the field.

Great. Thank you.

Thanks, Craig.

Your next question comes from the line of Mike Swartz. Your line is open.

Hey guys, good morning. Just wanted to touch on the incremental boat capacity you've called out, just looking at maybe from a different angle. Are there incremental costs associated with that, that are flowing through the P&L. Is that just capital expense and then it goes to the P&L, how should we think about the cadence of those costs coming through during the year?

Hey, Mike. Good morning. It's Ryan. There is obviously some capital expenditure that's involved, certainly at Palm Coast as we bring it up to speed to be in Whaler facility, and then a little bit of expansion in the Portugal facility, but it is -- that is included in our plans in the guide for CapEx, and obviously also included in the margin performance guidance that we gave today. So it is a little bit in '21, a little bit more in '22 but it is all included in the guide and frankly anticipated as part of our normal CapEx budget.

Yes. These are not large ...

Okay.

… investments. There are large impacts, but the investments are pretty moderate.

Okay. That's helpful. And then just with the commentary on getting to $7 or plus by 2022, I think when you outlined your 2022 plans back in early 2020, you'd really built that around a flat industry, so 13% growth 2020, mid -- low to mid single this year, obviously we don't know what's going to happen in 2022 but it sounds like the 3-year average is going to come in above flat. Any way to think about how big that number could be or maybe what some of the offsets are that you've maybe experienced since you originally gave that 2022 guidance?

Hey, I will take this one again. Listen, it's obvious that there are some tailwinds and some headwinds, but certainly the market is a good tailwind right now, Mike. That to be said there is still things that we will be fighting against, obviously no one saw the pandemic come. Where we can get to I think, you know what the original range was 625 to 725. We've got to put a stake in the ground as a floor and I think the -- where that can go depends on execution. It depends on the continued successful product launches that we're having, which we fully intend to do well. I will make one comment that the $7 or more does not include any impacted M&A. So to the extent, M&A would be completed, which we do believe we will, this year or next year, that would be accretive to the overall goal.

Yes, I would just add, I think as we were thinking through guidance this time, we thought it was more important to start establishing some floors than it was to fully incorporate the potential stack of opportunities, but here as we go through the first portion of this year we'll be looking again, but certainly we're protecting for some unknowables at the moment and we do think certainly that the full stack of opportunities is very significant.

Great. Thank you.

Your next question comes from the line of James Hardiman. Your line is open.

Hey, good morning guys.

Hi, James.

Good morning. So, Ryan, I wanted to maybe just extend some of the math a little bit for -- maybe just put a bow on this. I mean it sounds like, if we extend some of the wholesale-retail map out into '22, for all intents and purposes this replenishment cycle, if you want to call it that, it's going to go into 2023, right? Unless we see a pretty dramatic drop in 2022 retail to the tune of -- I get to north of a 20% drop before we can completely bridge the 10,000 unit delta that was created in 2020 and that doesn't even really account for keeping weeks on hand constant. Am I thinking about that the right way?

Yes, you are. Yes, your math is right.

Right. And there's no reason we should be thinking about a massive drop off in '20 -- and while it's way too early to give guidance on '22 and there's nothing that would suggest that we would go sort of to pre-2019 levels, which is what we'd be talking about once we exit all this.

We certainly don't see that James and maybe the increase more diverse participation in boating, the more people getting back into the activity that have been gone. People jumping into Freedom Boat Club, all signs I think point to people willing to be outside. They want to be on the water and the change in people's lifestyle I think with more flexible work arrangements and other just lifestyle changes is really offering people the ability to recreate outside more in different time. So we're just not seeing a path to what you would say as a significant decrease in boating participation or new boat sales in the near-term.

Got it. And then second question, as we work through some of these cash flow numbers, you're targeting $300 million in free cash flow, there is a $100 million each for debt and share buybacks. So that leaves another $100 million and your cash on the balance sheet is at least close to a record. So I guess, first, what's the right level of cash to hold on your balance sheet? And then, assuming that it's not $620 million, how should we think through some of these other operative -- obviously the obvious answer is M&A. I'm curious, what opportunities are -- not specific, but what opportunities are presenting themselves in terms of valuations in the market right now. And then maybe secondly, with Freedom Boat Club is almost like M&A that you own -- that you already own to a certain degree. So maybe think about what investments in your own franchises or corporate-owned clubs that Freedom Boat Club and how to think about return profile on that?

All right. Well, James, I will try to unpack -- I will unpack the first part and then maybe I will let Dave speak -- speak to that. Okay, so first off, I would tell you that just like our strategic plan, I would go ahead and allocate 100 or so million to M&A this year and next year, right? That is part of our plan and that's something that free cash flow will allow us to do. Coming down from the 629, it really starts with working capital reversing. This year we grew working capital up kind of over $200 million. I think you'll see a pretty significant reverse in 2021 just solely because we need to build inventory and again building inventory in Propulsion and P&A. Just a reminder, we don't have a lot of boat inventory, primarily web as we sell the boat directly through the dealers quickly after they are manufactured. And then there is puts and takes on a little bit more CapEx -- obviously there's going be a little more taxes paid. So I think once you sit down and see the working capital reversal, which is significant, right, it is going to be $350 million. You are going to get to a number of around $300 million free cash flow and then now ending cash, we're very comfortable ending cash anywhere between $300 million and $400 million. I think we will likely -- are still be at or about that at the end of the year, we could be a little more or a little less, but that gives us plenty of room, together with our untapped credit revolver that we’ve available to us, that gives us enough liquidity. And maybe Dave on Freedom and some of the equity.

Yes. Hi, James. That’s the one -- well, I think maybe yes there are acquisitions available that we are -- on our M&A teams are, I would say, active at the moment. In the spaces that we’ve previously indicated, our strategy is going to be focused on. In terms of Freedom and other -- and kind of related businesses, we are pursuing a very aggressive strategy with Freedom as we get the core business on its growth trajectory. We are able now to focus on how we build out monetizing the business and how we expand it, not just in the U.S. but internationally. And I would tell you that we will be in our Investor Day in spring presenting you with a much more comprehensive view of what Freedom might look like over the long-term, domestically, internationally and with adjacent business opportunities.

It's really helpful. Looking forward to it. Thanks, guys.

Thanks, James.

Your next question comes from the line of Anna [indiscernible]. Your line is open.

Hi, good morning. Thanks for taking my questions. I guess earlier this year, we talked about how Mercury share had already eclipsed some of the targets that were laid out at the Investor Day. Could you maybe update us on how you're thinking about 2022 in terms of the market share gains that we could see there?

Yes, we try to stay away from being too specific on this, but I would say that Mercury's momentum if anything is accelerating. And when you see the product that we are going to release very soon that is only going to increase the acceleration. So I'm sorry about not being too precise, but I would say that the trend is extremely favorable and accelerating and we expect it to continue.

Okay, got it. Thanks. And then turning to the market margin guidance, but I guess does this incorporates some of the catch up on R&D or other OpEx that was pushed out from 2020 as you reprioritize kind of at the height of the pandemic earlier in 2Q?

Yes, to be honest, in 2020, we did not slow down any key strategic initiatives. So we kept investing in product developments, in our digital strategies. There were some items of -- kind of maintenance type stuff that we pushed out and they certainly will be caught up in this year. I would tell you though that we certainly are increasing our investments in technology, particularly in our ACES strategy, you will see that not only in our business units, but also somewhat in enterprise costs, some of those technologies are advanced enough so that we need a kind of holistic enterprise effort. So, yes, the capital expenditures this year will reflect some catch up on kind of maintenance type activity some further obviously investments in new product, some capacity as we've outlined and I would say some increased investments in our ACES and related technology strategies.

Great. Thanks.

Thanks, Anna.

Your next question comes from the line of Gerrick Johnson. Your line is open.

Great. Good morning and thank you. So speaking about supply, it sounds like the flow is pretty good, so [indiscernible] concerned about getting to the 25% 1Q top line growth with inventory down 40% and looking at the whip down 7% seems like you're going to have to flow a lot of inventory in the quarter. So if you can talk about that for a second.

Yes, Gerrick, we're pretty comfortable with the revenue guidance. Yes, there is pockets of inventory down. Obviously, we have got to dig a little deeper. I think we're building capacity, building inventory and keep a pulse scenarios in P&A as well. Obviously, there's places that were a little bit more, hand them out, but we're working through that obviously and getting product to our dealers and OEMs and it could be as necessary. And remember a lot of our P&A is delivered same day, next day all over the world. So there's not a real need for it to sit in inventory very long in ours or in the dealers when a customer makes that order. So I think we're controlling it and obviously we will watch for various pockets, but we are pretty comfortable with the first quarter guidance.

Okay, great. And beyond flow, how about cost? With the constraints and bottlenecks that we are seeing everywhere. We are seeing increased cost logistics, all sorts of things. Any risk to your guidance that those costs baked in could go higher?

Well, I suppose there's always a risk, but I think obviously, we have mid-year pricing. Our pricing is designed to be net positive, if you like, and we have some adjustments that we can make in the businesses through the year, both the model year for our boats and during other periods. Given demand, I think there is no reason why we should not be able to net out costs, although obviously we'll be managing and pushing back everywhere we possibly can. I would say at the moment, those costs are containable.

Okay. All right. Great. Thank you.

Thanks, Gerrick

There are no phone questions at this time. We would like to turn the call back to Dave for some concluding remarks.

Well, thank you all very, very much for joining us. 2020 was a challenging year, but as you can see the business really fired on all cylinders. We anticipate doing exactly the same in 2021. Regarding our guidance, I would say that we incorporated not just certain unknown risks, but also some unknowables and probably not the full stack of opportunities that we have going forward. So we will continue to look at that as we continue to report earnings throughout the year. The new product launches in the next few weeks are astonishing and you will enjoy them. Please stay in touch. They're very exciting and that's just part of the next leg of differentiation and growth for our businesses that we are extremely excited about and look forward to sharing more of that with you at our virtual investor event in the spring. So thanks everybody. Thanks to our tremendous team at Brunswick for a fantastic year. Thank you all for joining us this morning.

This conclude today’s conference call. You may now disconnect.