Brunswick Corp Q2 FY2020 Earnings Call

Good morning, and welcome to Brunswick Corporation's Second Quarter 2020 Earnings Conference Call. All participants will be in a listen-only mode until the question-and-answer period. Today’s meeting will be recorded. If you have any objections, you may disconnect at this time. I would now like to introduce Brent Dahl, Vice President.

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 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 everyone. Our second quarter performance again demonstrated the power of our marine-focused portfolio, despite the unprecedented disruption to the global economy, resulting from the COVID-19 pandemic. Our operations and supply chain teams did a wonderful job of quickly and safely restarting and ramping up our global production facilities, while rigorously applying our COVID-19 health and safety protocols. We continue to enhance these protocols to keep our 13,000 global employees safe and I want to thank them all for their hard work, sacrifice, and vigilance during this challenging time. All our businesses outperformed our expectations in the quarter. Our resilient aftermarket-driven Parts and Accessories business stayed strong and supported consumers as stay-at-home restrictions were lifted and boaters returned to the water in force. Demand in the U.S. retail marine market accelerated into May and June resulting in robust new boat and engine sales with sales to first-time purchasers or returning lapsed boaters representing approximately half of new boat sales. This surge in demand together with the suspension of production of most of our manufacturing facilities from late March into mid-April, due to the pandemic, resulted in our lowest mid-season pipeline inventory levels in almost 20 years with 34% fewer boats in dealer inventory versus the second quarter of 2019. This strengthening demand combined with market share gains, especially in Mercury's higher horsepower outboard engine lineup, resulted in stronger top-line earnings and cash flow performance than anticipated with the businesses deleveraging consistent with our expectations shared on the first quarter call. Uncertainty in the global economy remains as a result of the unpredictable trajectory of the pandemic and we will continue to focus on controlling costs through structural cost reduction actions while remaining flexible with our capital strategy to enable investments in new products and technology. The COVID-19 pandemic materially impacted our global business operations in the quarter. We temporarily suspended manufacturing of most of our engine and boat facilities late in the first quarter as states implemented stay-at-home restrictions. On April 13, we resumed operations at Mercury's facility in Fond du Lac and at Boston Whaler and opened the remainder of our facilities over the following weeks. As of today, all our global manufacturing and distribution facilities are online with a continued focus on rigorously applying evolving and automating our COVID-19 mitigation procedures, including temperature screening, distancing, PPE, and cleaning protocols. Approximately half of our dealer network was closed in some capacity in April, but the network was fully operational by mid-May. Enabled by our distribution business, which continued to operate throughout the pandemic, our dealers have been extremely busy selling products and getting boaters out on the water. As travel, sports, camps, and other traditional summer activities have been restricted by the pandemic, boating usage has increased as people look to recreate outside in a socially distanced environment. Freedom Boat Club was also affected by the pandemic as many of its locations were closed in April, due to local stay-at-home restrictions, particularly in Florida. However, once stores reopened, several locations had many of their busiest weekends in history, with strong membership increases across the network. Finally, despite focusing on issues related to COVID-19, we've also maintained momentum and investment in new product programs and have accelerated our digital initiatives. Progressing these programs and initiatives is critical in enabling Brunswick to continue to differentiate itself as the clear leader in the recreational marine industry. I'll now provide some highlights on our segments in the overall marine market. The Propulsion segment continued its strong performance despite closing its primary manufacturing facility for several weeks early in the quarter then having to ramp up production upon reopening. The results were positively affected by healthy inventory levels entering the quarter, which allowed sales to continue during the shutdown period with sales primarily made to dealer and international channels during that period. Similar to the Boat business, Mercury's pipeline inventory of outboard engines is significantly lower than past years requiring production increases in the back half of the year and into 2021, and potentially beyond to refill pipelines and meet demand. Mercury continues to gain outboard engine market share especially in higher horsepower categories, where we have focused significant investment in new products and capacity in recent years. Due to our strong product lineup, Mercury has been successful in converting OEMs to its products with a number of additional conversions in process. A significant recent OEM win was the partnership with BRP announced in May, when Mercury became the global outboard engine supplier of choice for BRP's U.S. based boat brands Alumacraft and Manitou and became the exclusive package supplier for its Australian Telwater brand. Subsequent to the May announcement, Mercury also signed an agreement with Scandinavian-based Frydenbø to become the preferred engine partner of the company's boat brands Sting and Nordkapp in all global markets. Mercury's aggressive product development cadence remains on track with significant new product launches over the next year. For our P&A segment, second quarter results were bolstered by our distribution business as very healthy boat usage commenced once stay-at-home restrictions were lifted. Our distribution business remained open throughout the pandemic supplying products to support our dealers, as they attempted to quickly get boats prepped and on the water for summer along with supplying essential businesses with critical products as they fought the coronavirus. The aftermarket portion of our P&A business had a steady quarter with accelerating demand in May and June. The smaller OEM portion of the business had a slower start to the quarter as boat builders were closed due to the pandemic. However, sales progressively increased through the quarter, as customers came back online and retail demand strengthened. Including Power Products, our P&A business represented almost 40% of the company's sales in Q2 and was able to hold adjusted operating margins relatively stable versus Q2 2019, while generating strong cash flow. In June, the business delivered revenue and earnings that significantly exceeded 2019 levels. The Boat segment remained profitable in the quarter, despite significantly lower volume in April due to the production shutdowns. The business delevered at a very respectable 25% even with shutdown-related absorption unfavorability illustrating the benefits of our recent structural cost reductions despite the headwinds in the first half of the second quarter. Pipeline inventory levels, a key driver of future wholesale boat sales, ended the quarter at approximately 23 weeks, the lowest level at the end of the second quarter since the early 2000s. Boston Whaler and Sea Ray have seen very strong retail sales and their dealer inventories are especially low. And our value brands have also performed well at retail and will also require significant pipeline replenishment. We are hiring additional workers at most facilities to ramp up production, but it will be well into 2021 or potentially later before pipelines are normalized. Freedom Boat Club continues to exceed our growth expectations. Freedom recently opened its 235th location and now has 33,000 memberships company-wide with over 4,600 new memberships added in the quarter alone. Each membership often has multiple members who can enjoy the membership advantages, resulting in an increased installed base for future boaters and more P&A generation through increased boat usage. There are now more than 3,000 boats in the Freedom fleet with strong sales of Brunswick products into the franchise network. Finally, our investment in accelerating and improving our digital footprint has yielded strong consumer engagement and lead generation. Together with initiatives, such as our virtual boat show held last week, our focus on digital technologies is enabling us to reach and engage with a wider audience of potential new boaters. Next, I'd like to review the sales performance of our businesses by region on a constant currency basis excluding acquisitions. In the U.S., total revenues were down 19%, while international sales remained steady and were down only 3%. International markets remained relatively resilient in the quarter, as certain countries restored more normal business conditions earlier than the U.S. Asia remained a bright spot with strong demand for higher horsepower outboards, generally for commercial purposes and steady P&A sales. Finally, although not fully reflected in the revenue figures on this slide, our Canadian businesses have seen a measurable uptick in retail growth since mid-June with the positive momentum carrying into July retail sales. This table provides some color on the performance of the U.S. marine retail market. The second quarter has historically been the largest retail quarter comprising almost 45% of the total sales volume for the year. As you can see, retail improved significantly as we progressed through the quarter. April retail was down significantly due to stay-at-home restrictions, which limited dealer operations and customer traffic. May sales improved as states reopened and June was one of the strongest single retail months on record. Note that an independent study of June boat registrations showed that 40% of Brunswick's new boat sales in June were to first-time boat purchasers, which outpaced the industry by a considerable margin. Overall, retail volume for the main powerboat segments was down 8% versus Q2 of 2019 according to SSI reporting to date. Note that there is likely a significant amount of lag time in the reporting as our own internal registration data shows June year-to-date retail growth for Brunswick brands while SSI still shows us down 5%. Outboard engine unit registrations were up 13% in the quarter with Mercury outperforming the market, especially in high horsepower categories. Finally, based on information from our banking partners and internally through our Bluewater Finance business, applications for retail financing continued to outpace 2019 levels in July with steady retail demand continuing as we close out the primary retail selling season. I'll now turn the call over to Ryan for additional comments on our financial performance.

Thanks, everyone, and good morning. As mentioned earlier, the COVID-19 pandemic significantly impacted our global operations this quarter, making year-over-year comparisons challenging. Net sales decreased by 15%, while adjusted operating earnings fell by 35%. Our adjusted operating margins were 11.9%, and we ended the quarter with an adjusted EPS of $0.99, down 32% from the previous year. However, our results exceeded expectations due to strong demand in the latter half of the quarter and cost reduction measures implemented over the past year. Corporate costs saw a slight increase compared to last year, primarily because cost reductions were offset by mark-to-market adjustments related to our nonqualified deferred compensation plan and expenses linked to our long-term incentive arrangements. The pandemic also influenced our first half results, with net sales down 12% compared to 2019 and adjusted operating earnings down 24%. Our adjusted operating margins stood at 11.8%, and despite various challenges, we achieved a respectable deleveraging of 28%. Now, let's review our second quarter performance by segment. Starting with the Propulsion segment, revenue dropped 14%, as the ongoing strong demand for high horsepower outboard engines was balanced by anticipated production disruptions at Mercury and its OEM customers due to the pandemic. Operating margins and earnings declined as cost reduction benefits were outweighed by lower sales and adverse absorption effects from the production disruptions, along with unfavorable foreign exchange rates and tariffs. If we exclude the effects of tariffs and currency fluctuations, the Propulsion segment's adjusted operating margins for the first half of 2020 would have surpassed those of the first half of 2019. Notably, despite a tough quarter, the Propulsion segment demonstrated strong earnings and margins in June as volumes rose. In our Parts and Accessories segment, revenues fell by 6% and operating earnings decreased by 9% compared to the second quarter of 2019, as robust sales growth in distribution was offset by decreased sales in other areas. Adjusted operating margins remained solid at 22.6%, only 80 basis points lower than the same quarter last year, and year-to-date margins were just 40 basis points shy of those in 2019. Revenue and earnings were adversely affected by stay-at-home restrictions, which disrupted dealer and retail operations early in the quarter, but were somewhat mitigated by recent cost-saving actions. The Advanced Systems Group experienced greater impacts from boat builder closures compared to other segments due to its higher sales exposure to OEM customers. Overall, this quarter was particularly strong for the Parts and Accessories segment, reinforcing our strategy to expand this portfolio through both organic and acquisition efforts. These robust aftermarket-driven businesses provide resilience and unique earnings potential, ensuring stability even when other industry segments face pressure and enhancing shareholder value. Revenues in the Boat segment fell by 32% due to significantly reduced wholesale volume resulting from a temporary manufacturing halt in most plants in April and subsequent ramp-up activities in May. This segment remained profitable, demonstrating the effectiveness of cost containment and efficiency measures implemented in recent years. Historically, during previous downturns, the Boat business experienced similar revenue levels without profitability. Many of our brands excelled at retail this quarter; Boston Whaler and Sea Ray exceeded market performance, Lund remained the leader in premium aluminum fishing boats, and our value brands showed strong demand. Retail in the latter half of the year may face constraints, especially in our premium fiberglass segments due to lower dealer inventory. We continue to increase production to meet retail demand and replenish our pipelines. Freedom Boat Club also had a solid quarter, contributing over 2% of sales. Due to high demand, dealer pipelines finished the quarter at historically low levels, the lowest mid-season levels in nearly 20 years, with 23 weeks of boats available based on a trailing 12-month measurement and fewer units in the field compared to second quarter 2019. We are ramping up production across our facilities to address demand and refill pipelines, but with continued retail strength in July, inventory levels may not normalize until after the primary retail season of 2021 or later. Although we are nearing the end of the retail selling season, projecting the demand landscape and operating results for the remainder of 2020 remains highly uncertain. The pandemic's progression continues to be unpredictable, which affects our dealers, OEM partners, suppliers, and the broader economy. These elements will significantly influence the marine market's performance and the overall health of consumers. Accordingly, our businesses are preparing for various scenarios. For the remainder of the year, we expect U.S. marine industry retail unit demand to rise slightly, with stronger demand domestically compared to international markets. We believe wholesale numbers will outpace retail in the latter half of the year, primarily due to pipeline reduction actions from 2019 and the current low pipeline levels we've outlined. Our operating expenses are projected between $560 million and $575 million for the year, representing a roughly 10% decrease from our initial plan for 2020. While this is slightly above our estimate from the first quarter, it signifies costs necessary for growth in a recovering market while continuing to invest in key product and technology initiatives that we believe will lead to future market share gains and earnings growth. The recovery of the global economy, normalized channel operations, and the absence of significant disruptions will be crucial in determining whether we align with our current projections. We anticipate our revenue and operating earnings for the second half of 2020 will surpass those from the second half of 2019, supported by steady performance in our Parts and Accessories business and increasing production in the Propulsion and Boat segments. We expect full-year free cash flow generation to exceed $325 million. As for our operating leverage assumptions, our deleverage of around 28% in the first half aligns with our expectations. Reductions in production volume led to unfavorable absorption across all segments, which were also negatively affected by other COVID-19-related costs. Each segment managed to mitigate a portion of these impacts through cost measures and efficiency efforts. In the second half, we expect operating leverage in the high teens to low 20s percentage range, consistent with historical norms, as we anticipate increased production levels will alleviate absorption challenges. However, COVID-19-related costs will continue to pose challenges as we navigate potential supply chain disruptions, increased absenteeism, and additional safety measures for our workforce. Our liquidity position remains very strong and is a focus area for us. Our liquidity planning is contingent on several factors, including our cash reserves, free cash flow generation, access to our revolving credit facility, and our repayment and dividend commitments. We expect to generate over $325 million in free cash flow this year, which aligns with our initial target set in January. By year-end, we project total liquidity to approach $850 million, having closed the second quarter with cash balances of $553 million, an increase from $332 million at the end of 2019. This rise includes $124 million in free cash flow generated in the first half and additional borrowings under our revolving credit facility, with some of it already repaid. Our first half free cash flow exceeded that of 2019 by approximately $110 million, primarily due to significantly lower working capital usage driven by reduced inventory levels. We anticipate favorable working capital trends and positive earnings for the remainder of the year. Importantly, the borrowing capacity of our revolving credit facility is contingent on compliance with leverage and interest coverage tests, and we have a sufficient cushion against these requirements based on our expected earnings. Finally, I want to touch on various items that will influence our P&L and cash flow for the rest of the year. Besides the updated free cash flow estimate provided earlier, most of these projections have either remained unchanged or only slightly modified since our last call. One variation is in working capital, where we now foresee only minor usage of up to $10 million for the year. Given demand and production factors, inventory levels have significantly decreased over the first half. While we anticipate modest inventory increases in the latter half within our Propulsion and P&A segments, we expect only slight working capital usage overall. We expect depreciation and amortization expenses to be between $115 million and $120 million. Our effective tax rate is estimated at 21% to 22% for the year, with a cash tax rate forecasted in the low double-digit range. The average number of shares outstanding continues to be approximately 80 million. Our capital strategy assumptions have not materially changed, with updated estimates for debt retirement now targeting $60 million of our significant free cash flow generation for additional repayment of our 2023 term loan, aligning with our original plan from earlier in the year. This will result in a total debt retirement of $100 million for the year, with our debt-to-EBITDA leverage expected to approach 1.5 times on a gross basis by year-end. Our capital expenditure projections are rising slightly as we consider the capacity to accelerate additional projects this year, assuming no adverse economic conditions. Additionally, we plan to issue our upcoming quarterly dividend of $0.24 per share, consistent with Q2 levels. This decision reflects our strong financial standing and our commitment to sustaining dividends throughout economic cycles. We will continuously assess our dividend policy on a quarterly basis as the situation evolves. Finally, our revised estimate for net interest expense stands at $67 million, reflecting earlier repayments of borrowings from our revolving credit facility along with the discussed term loan repayments. Now, I will pass the call back to Dave to continue with our outlook comments.

Thanks, Ryan. Although it's been a challenging first half of the year, our businesses are executing extremely well against our operating and strategic priorities. In the Propulsion segment, we continue to leverage the strongest product lineup in the industry to gain market share in the parts of the market, where we've been historically underrepresented. Our further growth into saltwater re-power and international commercial markets is being enabled by the capacity added last year and will be bolstered by further investment in exciting new products. Finally, with low engine inventory levels across the globe, our plan is to increase production in an efficient manner to refill the pipeline. In the P&A segment, we anticipate favorable boat usage trends to continue as people look to remain active outdoors in a socially distancing setting. Additional hours on the water drive the need for consumables and replacement parts, which are delivered same day or next day to thousands of points of sale across the globe through our distribution network. We also expect Power Products to have a solid second half, as it expands its systems integration business, which provides boat OEMs with complete and bespoke system solutions for their boat models. In our Boat segment, we will continue to focus on launching new products across the portfolio, including some new products designed for younger boaters, rapid production to meet demand and refill pipelines, and returning to our stated plan to improve operating margins. We anticipate back half operating margins in the high single digits as additional volume benefits and cost initiatives should drive improved margin performance. Freedom Boat Club continues to expand and execute against its strategic growth strategy. We have added 25 locations thus far in 2020, bringing the number of locations to 235. And we continue to increase the share of Brunswick products throughout the franchise network. We will also continue to further our enterprise-wide investments and capabilities in many areas including digital marketing, e-commerce, consumer insights, and data analytics, while also driving our ACES strategy forward. These initiatives will drive deeper, more seamless consumer engagement and enable future growth. Again, I would like to thank Brunswick's 13,000 employees and their families, in addition to our channel and supply chain partners, for their incredible commitment and resourcefulness during this challenging time. There remain many unknowns and unknowables that may impact our business in the shorter or longer term. However, we continue to believe that our 2022 strategic plan financial targets remain in reach. In closing, while we remain very cognizant of potential future macroeconomic headwinds and other uncertainties, our resilient second quarter performance together with a surging marine retail environment has created substantial growth opportunities for the remainder of 2020 and 2021. Given recent sustained demand, elevated production levels over time will be required to rebuild pipelines and together with substantial upcoming new product offerings, should drive wholesale growth through 2021 or potentially beyond. Our focus on structural cost containment, along with our strong financial profile and healthy balance sheet and liquidity, enables us to invest in our businesses, consistent with our standing objective of driving shareholder value, while ensuring that we continue to prioritize and devote our best efforts to protecting the health and welfare of our employees in the COVID-19 environment. Earlier this week, Brunswick was named to Forbes list of America's Best Employers for Women. From the thousands of companies that were considered for this honor, only 300 made the final list. Brunswick is ranked number 108 overall, second in the engineering and manufacturing category and fourth in the State of Illinois. This recognition comes shortly after Brunswick was named by Forbes to its list of the Best Employers for Diversity earlier this year, and in 2018 and 2019 being named amongst America's Best Employers. These awards reinforce our dedication and commitment to equal opportunity, inclusion, and diversity across our entire global workforce, and we will continue to prioritize thoughtful actions to accelerate our progress. We all recognize that we're operating in uncertain times. We plan to remain flexible so that we can react quickly to change, capitalize on market demand, and retain our financial strength regardless of macroeconomic conditions. On behalf of myself and the Brunswick team, I would like to again send continued heartfelt best wishes to those most affected by COVID-19, including those fighting and recovering from infection and the first responders, healthcare workers, and essential employees on the front lines. Brunswick will continue to do our part in helping our communities persevere through and ultimately recover from this crisis. I'll now open the line for questions.

Thank you. Our first question comes from James Hardiman with Wedbush Securities. Your line is open.

Hey, good morning. Thanks for taking my call. Obviously these are unusual times, so I wanted to make sure I adequately understood some of the numbers you've given us here. I guess let's start with June. I think you said June was a record month for most of your brands. I just want to make sure I understand that. Is it a record month of June, or is it a record for any month? Is it at units or dollar or both? And ultimately I'm trying to get at just the fact that the industry used to be twice as big as it is today, or more at times and some of these brands go back a long time. What's the history that you're looking at when you're saying that June was a record month?

Hi, James, this is Ryan. Yes, you're correct. June was a record month in terms of retail units for many of our brands, reaching back to the time of the Global Financial Crisis. While the industry was previously at 300,000 or 400,000 units, which is a completely different scale, it certainly stands as a record for the last 15 years since the GFC.

Got it, okay. I just wanted to clarify. As I try to reconcile the SSI's reported 7% decline for the industry this year with your expectation of below single-digit growth, it seems that, if we take the SSI numbers at face value, we would need double-digit growth in the second half of the year. The SSI data may not be completely reliable, but considering that you usually incorporate a degree of conservatism into your forecasts, how should I interpret this? Does it suggest that the SSI figures for the first half are significantly better than indicated, or do you believe the second half will remain strong from a retail standpoint?

Hi, James, it's Dave here. I believe the answer is both. Our internal registration data is significantly ahead of SSI, which reflects our brands' strong performance. However, we also anticipate some future revisions to SSI for the first half. The momentum we observed, particularly in June, is still present in the marketplace. As we enter the latter half of the selling season, July is showing very strong results.

Okay. And then I guess last question. What do you think your business could do in terms of boat retail through the year? And I guess if I just take a step back, retail for the industry is now expected to be at/or better than it was when you originally projected it at the beginning of the year. Your free cash flow numbers are back to where they were, although on lower CapEx I believe. OpEx better than you thought. I guess is it possible for you to get back to the original earnings guidance for the year?

I believe 2019 might be achievable. However, I'm uncertain if we can produce enough products in the latter half of the year to reach 2020. We will certainly do our best, but it seems that 2020 is likely not feasible for us.

Yes, Dave, I agree with that. And James, consider the absorption impact and some of the costs we faced this quarter due to the temporary production halt and the subsequent ramp-up across all our facilities except for P&A. It will be quite challenging to recover those costs and return to our original guidance.

Got it. And the retail is there a way to think about how you guys are projecting your own retail for the year?

I think we believe that we will be at/or exceed the industry.

I believe that early indicators for us show very strong market performance for the brand. Although we didn't specifically mention it in the slides, we are significantly ahead of the broader market when it comes to attracting new boaters. As you know, we own three of the four most recognized brands in the industry, and new boaters are likely to gravitate towards these well-known names. We're currently reaping the benefits of owning those strong brands.

Makes a lot of sense. Thanks guys.

Thank you. Our next question comes from Randy Konik with Jefferies. Your line is open.

Thanks a lot. I guess, maybe a question for Ryan here. In the press release, you talk about having to slightly take up your expense estimate for the year obviously to help with the higher demand function, but it's only slightly higher. So, can you kind of elaborate a little bit more on the efficiencies you're kind of gaining in the business around the ability to take those expense reductions? And then kind of give us some perspective on how we can think about those continuing into the medium-term over the next few years, assuming that we potentially have a more robust multiyear demand environment that those costs can be kind of contained to give you margin expansion. So, maybe elaborate a little bit for us on these different efficiencies you're finding and going after in the business.

I think this question is for Ryan, but I'll respond to the first part. It's Dave. As you know, we implemented significant structural cost reduction actions in 2019 that carried over into 2020, which included a substantial decrease in staffing levels across the organization and various organizational initiatives that consolidated functions, especially in the Boat group but also across a wider segment of the enterprise. For example, about a month ago, we closed one of our supply plants in Greenville that was supplying our Sea Ray boat plant in Tennessee and Florida. We have sufficient space in those two facilities to manage what was previously housed in the leased plant in Greenville. This closure was completed in July. We are actively reassessing our footprint to ensure we have the capacity for future expansion while also firmly establishing our commitment to structural cost reductions, ensuring that these actions lead to genuine reductions in our costs rather than just temporary measures. Ryan?

Yes, that's all correct. I would also add that we are still operating about 10% below our plan for the year in terms of operating expenses, and much of that is due to day-to-day efficiency in the plants and facilities where people are engaged in projects to reduce costs in manufacturing processes. This will continue. Regarding what it may look like in 2020, 2021, and beyond, we would anticipate restoring some compensation and other elements back to 100% levels, and some inflation will return. However, the $50 million that was discussed and removed during the initiatives should remain out. Even if we reintroduce some costs into the business, it would be exclusively associated with growth initiatives.

Yes, that's very helpful. This indicates potential for improved margins. I also wanted to ask about the demand side and gain further insight. In your release and on the call, you mentioned engaging with first-time boat buyers and returning boaters. Could you provide more details on that? Are there any interesting data points regarding sign-ups for the Freedom Boat business and Boat Club business, particularly in relation to demographics? Also, is there anything from your dealer network that could offer us a clearer picture? I'm trying to understand whether the demand environment could be shifting towards boating on a more permanent or semi-permanent basis, suggesting a sustained demand cycle. Combined with the consistent cost savings, this could paint a strong outlook not just for the next quarter, but for the next few years. That's the direction I'm looking to explore.

No, thank you for the question. Great question. So, I think when we said 50% of boaters or people buying boats recently were either new boaters or returning lapsed boaters, that's over a period that extends through to earlier in the year. That shift has continued to evolve over the last few months. So, if you think about it, if you're a new boater, it's not a decision that you probably immediately come to. If it's a – if you're a lapsed boater you probably come to it more quickly. It's an obvious thing that you've done before and that you can re-engage with. There's more to think about, if you're a new boater. So what we found – we now do surveys every month to try and keep a closer track of that and also work with independent third parties, who study that data. In – and as I mentioned earlier in June for Brunswick brands, 40% of sales were to new boaters. And that's not new boaters plus lapsed boaters, it's just new boaters. And we were significantly ahead of the industry many points ahead of the broader industry. Some of our value brands, particularly a brand like Bayliner, which may be an entry point for a new boater in June, 60% of Bayliner's sales were to new boaters. So this is the breadth of a portfolio and the fact that we're able to offer both value and premium across the company with different boating styles, I think allows us to access many of these new boaters. And I think we're going to over-index because of the strength of the brand and the breadth of the portfolio. And we believe obviously there are a number of things to do to keep these boaters in boating once they buy. But I think one of the best indicators of people continuing in boating is having a great experience whether that's through a great new boat or through Freedom Boat Club, and we're providing those great experiences. Freedom certainly is benefiting hugely with massive membership growth significantly beyond our expectations. In terms of demographics for Freedom, there are about twice as many women who are members of Freedom Boat Club than proportionally own boats. So it's a we over-index on women. We also over-index on younger boaters in Freedom Boat Club. So I think a great demographic play for us. And certainly, our brands which is some of the best known in the industry are attracting in a lot of new boaters.

Thank you. Our next question comes from Scott Stember with CL King. Your line is open.

Good morning, guys. Thanks for taking my questions.

Hey, Scott.

Just talking about the new customers, I think you said 40% were new to your brands were new to boating. Could you just talk about the age range that you're seeing from these new customers and maybe the creditworthiness of these new people?

Yeah. We have no – there's no change in creditworthiness so they're all very solid. In terms of age, they're certainly trending younger significantly younger, I would say. And also they tend to have larger families, because they're a different life stage. So they're looking for pontoons, runabouts, boats that – for multi-purposes. And yeah, this is new boater not just new to our brands. So yeah, we have a lot of demographic trends that we can share on those boaters, but certainly trending meaningfully younger and larger families.

All right. And with regards to Freedom, it seems like you guys are growing rapidly there. Can you just talk about the fleet of boats replacement expansion and how Brunswick will take advantage of Brunswick's brands at that expense?

Yeah. We – so we now are at as I mentioned earlier 3,000 boats in the fleet. The boats turn over about every two to three years which means that now there are something in the range of well more than 1,000 boats every year that are coming up to be renewed by new boats. We are penetrating well ahead of our expectations in terms of new Brunswick boats. Sea Ray is particularly popular Bayliner is popular. Our pontoon brands are extremely popular. And Mercury engines are penetrating even faster than Brunswick boats, because it's possible to convert non-Brunswick brands to Mercury engines as well. So we are well ahead of our expectations and on an accelerating trend in terms of penetrating Freedom Boat Club with our brands. If you think about the fact that we've owned Freedom for just over a year now, which means that we've only had a relatively rather short period to both market and provide our brands, I would say, we're doing extremely well, and expect to continue to be beyond our original expectations.

Got it. And just one last quick one on boat shows. Obviously, it seems like a lot of them are getting canceled. What's the in the event that there are no boat shows or any major boat shows this year what's – how will this affect your new product launch cycle?

It will not have a significant effect on our new product launch cycle. Every industry is adapting to digital and social media types of product launches due to the lack of physical trade and boat shows in our sector. We do not anticipate it impacting demand. The pandemic has effectively replaced any influence that boat shows might have had on short-term demand. We recently held a virtual boat show, which was very well attended, comparable to a typical physical boat show. We plan to enhance our online capabilities. We expect that at some point in 2021, we will be able to return to physical boat shows, and there are a few scheduled for 2020 that we are monitoring. However, we are focusing on developing strategies to launch our products and generate interest online without relying on physical shows, and it will not significantly change how we introduce new products.

Thank you. And our next question comes from Joe Altobello with Raymond James. Your line is open.

Thanks. Hey, guys, good morning.

Hey, Joe.

First question, I was a little surprised that you talked about wholesale growth through 2021 and potentially beyond given all the variables that go into that. So I guess my question is how much will retail performance impact that, or are channel inventories just so low at this point that you can get there just through replenishment alone?

Yes, Ryan, I'm still uncertain. Even considering normal demand, we are about 12 to 13 weeks behind where we should be, which amounts to a quarter of a year's production. Therefore, our ability to increase production while also meeting demand will extend well into 2021, even with modest demand scenarios. We cannot produce at 125% capacity and expect to quickly normalize our supply pipelines while meeting demand. This will be a lengthy, long-term rebuilding process.

Okay. And just as a follow-up to that, you did mention this morning that the 2022 targets that you laid out back in Miami are still in reach. And I'm just curious what has to happen both internally at Brunswick as well as externally from an industry standpoint for you guys to get there?

I'll ask Ryan to comment on this. But just broadly, I think the knowables would say that they're solidly in reach. It's the unknowables that's causing us to have a bit more caution about how we discuss this. But the building blocks that we've put in place for those targets that included very modest market growth. But the remainder of it was in our hands and remains in our hands. And Ryan, I don't know if you want to comment on specific...

Yes. If you recall, the 2022 plan was based on minimal market growth, approximately flat or an increase of 1% or 2% at most, depending on the year. What you are seeing is a slight acceleration in 2020 compared to those targets, which also allows us to increase wholesale sales in the latter half of this year, into 2021 and 2022. This is effectively compensating for some delays in our capital strategy, such as share repurchases that were part of the 2020 plan and are now likely to be postponed, as well as some planned M&A activities that may be pushed back to later this year and into 2021 and 2022. Overall, there is a minor delay in terms of earnings per share and some other aspects of our capital strategy, but it is being mitigated by some positive market conditions we've observed. Furthermore, metrics like leverage, margin, and free cash flow generation have not changed significantly, especially considering the inventory situation, which contributed to free cash flows in the quarter. So, it's mainly about a slightly improved market helping us to counterbalance some of the capital strategy elements that will take a bit longer.

Got it. Okay. Thank you guys.

Thank you. Our next question comes from Eric Wold with B. Riley. Your line is open.

Thank you. Good morning, guys. Just a couple of follow-ups on Freedom Boat Club. So with the 16% sequential increase in memberships in Q1 to Q2, can you give us a sense of what that was kind of on a same-store basis? And I guess what I'm trying to get at is if you're seeing a lot of demand coming in to these clubs and kind of the existing clubs, how are the clubs handling that in terms of limiting memberships, any sense of kind of waitlist for people that want to join kind of a backlog? How much capacity do they have to add boats to their network? I know they're probably space constrained. I guess how are they getting around that? And then second part of the question is kind of going to the previous one on replenishment of the boats in Freedom Boat Club is that strictly on a time basis, or is it on a usage basis, so if that usage ramps up that replenishment could accelerate?

We consider this in a couple of ways. In terms of long-term capacity for Freedom Boat Club, we've previously stated that there are significantly more potential locations available in the U.S. Additionally, we are looking into international expansion. Currently, we have 3,000 boats and 33,000 members, and we're aiming to maintain a 10:1 member-to-boat ratio. While Freedom is expanding rapidly, there are some factors limiting the speed of this expansion. One key factor is our requirement for new members to complete both classroom and on-water training, which does create a backlog as this process takes a full day, including about four hours on the water. We need to ensure that individuals are properly trained and equipped to go out safely. Some locations have also taken unusual steps to acquire additional boats, such as purchasing from local dealers rather than retail outlets which can affect boat availability. Overall, Freedom is well-positioned despite these challenges. Aside from a few logistical issues, there are not many limitations to continued growth, and the momentum is extremely strong. The network effect is significant; the more locations we have, the more visibility and interest there is. It seems that every news outlet is covering Freedom Boat Club currently, highlighting our presence during the pandemic. As our locations increase, so does awareness and interest in membership. We are committed to maintaining the high standards expected of a premium franchise, especially regarding boat availability. The typical turnover for our boats is two to three years, and usage within Freedom is already high, not driven solely by hours but also by the quality expected by our members and the value in the pre-owned market. While there might be a slight increase in the turnover rate, it remains fairly steady at around three years for fiberglass boats and two years for pontoons.

Perfect. Thank you for getting through all those questions. Appreciate it. Great, guys.

Thank you. And our next question comes from Tim Conder with Wells Fargo Securities. Your line is open.

Congratulations to the team for navigating a very volatile environment. It is clear that it will take most of 2021, and possibly longer, for all business channels to return to normal. At this point, what specific supply chain constraints, particularly regarding labor, are you experiencing as you work to ramp up operations? Additionally, Ryan, we've seen a significant decline in the dollar since the end of May. I understand you engage in some hedging, but how should we view the impact of foreign exchange here? You didn't mention it, but as we look ahead to the latter half of the year, especially 2021, what should we consider?

Do you want to take that first?

Yes, I'll address the foreign exchange aspect, as it's quite simple. If the dollar weakens, particularly against the euro, it can provide some benefit. However, there are offsets with currencies like the Canadian dollar and others. That said, a stronger euro could positively impact our international sales. It doesn't significantly alter our hedging strategy, but it does create some advantages for sales outside of the U.S.

What was the first part of the question?

Labor. Okay, great. I’ll take that. So, yes, Tim, I would say that we're seeing some, kind of, on the margins at the moment evidence of supply chain needing to work hard to keep pace with us, I would say. It's not holding back anything material, right now. But, certainly, as we ramp up and accelerate, we are stretching some of the supply base. So I would say, right now, not a material issue for us, but something we watch and monitor every day. I think one of the advantages we have is our scale in the marketplace. I think we're a big customer for these marine suppliers and that gives us I think a strong position when it comes to obtain the components and systems that we need. So it's something that we monitor a lot, but it's not materially holding us back right now.

Are you experiencing any challenges in hiring for your facilities at this point?

Well, we are facing some logistical challenges due to COVID, which has resulted in many virtual job fairs and in-person job fairs where we maintain social distancing. Recently, Boston Whaler conducted a job fair and successfully hired about 150 people. It requires significant preparation, but we are making substantial progress in accessing high-quality new labor. Initially, new hires may be less productive compared to experienced workers, but that is a small trade-off for increasing our long-term capacity. We anticipate overcoming these hiring challenges as we move into the latter half of the year, particularly in Q3, and we are making good strides. While the process isn't completely easy, we are advancing effectively.

Okay, thank you, gentlemen.

Thanks, Tim.

Thank you. And we have a question from Craig Kennison with Baird. Your line is open.

Hey. Thank you, you've addressed most of my questions. But Ryan, I think you mentioned postponing some M&A and other capital priorities but you hinted that maybe in the second half of this year, the pipeline had some acquisitions in it. Maybe just address whether that pipeline is as active as ever.

Yeah, Craig, I mean as usual, we don't discuss any specifics, in terms of M&A targets. But I will say that, there are several areas that we continue to be very interested in, from an acquisition standpoint, primarily in our Parts and Accessories segment as well as Technology things that our Business Acceleration business unit is doing. So yes, I would tell you that, coming out as the macro economy looks to be still a little bit uncertain, but a little bit better than it was 90 days ago. I do think there'll be some opportunities in the second half.

Thanks. And then, just looking at the election cycle, it would appear that, tax policy may be up for grabs. How does that factor into your thinking for 2021, if we see a change in tax?

It's definitely a significant factor, Craig. Our tax team is constantly working to identify opportunities and assess the effects of any rate changes. As a worldwide company, we have various structural options available to maximize our income potential while also considering the tax advantages and possible implications. We'll stay on top of it. The tax team undertook a significant effort when the new tax ruling came out around Christmas a couple of years ago, and they'll be ready to tackle it again this year if there are further changes.

Perfect. Thanks so much.

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

Thank you very much. Thank you all for joining our call. We truly appreciate it. We are fortunate to offer enjoyable and varied recreational experiences that are compatible with social distancing. We are excited about the rising demand for new boats and boating experiences, as well as welcoming unprecedented numbers of new boaters recently. Our brands and products are excelling in this environment, becoming the preferred choice for new boaters. While we acknowledge the uncertainties in the current situation, we are pleased that our plans for 2022 remain strong. I would also like to highlight again the significance of receiving awards from Forbes for being the Best Place to Work for Women and the Best Place for Diversity. These accolades are essential for our business as they help us attract and nurture the talent we need to thrive in the future. Lastly, I want to express my gratitude to Bill Metzger, our former CFO, who has participated in all previous calls with us. I appreciate his years of outstanding service to Brunswick and for paving the way for his worthy successor, Ryan. Thank you all for your participation.

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