Dustan McCoy: ‘The worst is over’

Posted on Written by Reagan Haynes

01_mccoy_01CEO says Brunswick is poised to outpace the recovery he believes is at hand

“Oh, hey,” a New England Boat Show visitor called out when she saw the dealer who had sold her a Boston Whaler two years ago. “I love the boat you talked me into.”

Brunswick Corp. CEO Dustan McCoy was walking with that dealer and another local dealer but gave them room to greet their customer and her friend. The boat owner, in good spirits on a sunny February Tuesday in Boston, rattled off what she liked about the Whaler before her dealer pointed out that the man standing discreetly to the side was the top executive of the company whose subsidiary had built the boat.

Dressed in a cotton white-and-blue button-down open at the collar – no jacket or tie -McCoy slid easily into the banter. He chatted with the two women in the same cadence and with the same ease with which he addresses stockholders and analysts during quarterly earnings calls – the same demeanor and courtesy he uses when speaking with his dealers or food service workers at the Boston Convention Center. Colleagues say it’s that understated confidence and knowledge of his industries that gives McCoy an edge.

14_mccoy_02During Brunswick’s most recent quarterly earnings conference call, one analyst asked how McCoy could be so sure that new-boat sales had bottomed out in 2010, because sales had continued to slide throughout the year. After a back-and-forth during which McCoy repeatedly expressed confidence in the feedback he gets from his dealers, along with his statistical and gut understanding that boaters will always boat, the questioner fell silent.

McCoy explains it to others in more detail.

Between 200,000 and 300,000 boats have been registered annually for the last decade, he says. New-boat sales have taken a big hit, he concedes, but used-boat sales – even in the depths of the recession – slid only about 8.5 percent. That means even if boaters were scavenging for deals on aging and repossessed models, they were buying boats more consistently than consumers in many other industries were buying products.

Now that aging and repossessed inventory has largely been cleared, boaters are left to choose whether to continue to use their current vessels or buy new. Because data show boaters trade boats fairly regularly and gross domestic product numbers have improved, McCoy believes signs point to an industry recovery.

“Whether we’re going to get improvement in 2011 or not I don’t know, but I’m very comfortable that the decline is done,” says McCoy, speaking with Soundings Trade Only over lunch, looking down at the New England show from the exhibition hall’s skywalk cafe.

New-boat sales numbers last year appear to belie McCoy’s confidence, but history does not. Brunswick was scooping up boat brands until the fourth quarter of 2005 – the year McCoy was named CEO – when the company began noticing slight declines. Brunswick swiftly began to sell or discontinue lines, shrinking its brands from 24 to 16. The company appeared to act before many industries, apart from autos, realizing a recession was imminent.

“There really are a lot of people in the industry who are very smart,” McCoy says, shrugging off the notion that Brunswick acted ahead of the curve. “A lot of them did their own thing very quietly.”

As a publicly held multibillion-dollar corporation, that wasn’t an option for Brunswick. The swift action was meant to ensure profitability if the market tanked – and it did.

Aiming high

“We were never concerned about our survival,” McCoy says, holding a cup of light half-decaf coffee. “The real issue was how do we come out of this better than we went in? What we really want to do now is go to the next level of what the economy would give us and say, What else can we go get?”

As bullish as his words appear on paper, McCoy’s demeanor is relaxed and polite. He made time for an unscheduled interview, but didn’t chatter to fill empty spaces in the conversation.

All of Brunswick’s business units – marine, billiards, bowling, life and fitness – know what his expectations are. “We expect everybody to outperform the market with the segment in which they’re operating, and that runs the gamut, from shares to margins to quality and innovations,” McCoy says. “We expect every business to generate great operating leverage so that for every incremental sales dollar, we want significant amounts of that brought to the bottom line, and we’ve got the cost structure to do that now. And thirdly, we’re asking every business to be free-cash-flow positive as we go forward.”

Now that Brunswick has positioned itself for an improving economy, the company is focusing on furthering growth above the level of the broader economy, McCoy says. For now, that does not involve acquisitions. “We’re not looking at other brands, and we think we can do all this in the businesses that we’re in,” he says.

Beyond boats

When people think of the adjustments Brunswick has made in response to the economic collapse, attention falls on the obvious – the boats. With brands and models reduced by 30 percent, it makes sense, but the changes also have applied to engines, parts and accessories, and that has been crucial. For example, Mercury opted to close its facility in Stillwater, Okla., and consolidate production at its Fond du Lac, Wis., headquarters to keep overhead low.

Brunswick’s Mercury and MerCruiser dominate the market for outboards and sterndrives, ranking No. 1 in market share. The company’s parts and accessories business also is the world’s largest. “We can get 90 percent of Americans the part they need for their boat that day,” McCoy says, managing to sound humble. “Nobody else can say that.”

All three segments of Brunswick’s marine business have taken losses for the last three years so they would be ideally positioned when the economy rebounds, McCoy says. The company has invested heavily to ensure profitability at less than half the units that were sold industrywide three years ago. Now it can turn a profit, even with industry sales at an all-time low, McCoy says, and sales have nowhere to go but up.

Dealers are crucial

There is a new level of camaraderie among dealers who have survived the downturn, says Boston area Brunswick dealer Larry Russo, who chatted with McCoy over a salad in the convention center’s cafe.

“We are the No. 1 engine supplier in this industry; we want people to be successful,” McCoy says. “We want Formula customers to appreciate that engine. The key is to build a really good engine that they love. It’s good for the industry to have that competition out there.”

As boatbuilders compete for the remaining dealers in the industry, Brunswick remains in comfortable territory, McCoy says. “It’s not just because Larry’s sitting here. I mean, we have great dealers and that goes across our dealer network,” he says. “Our dealer network in our marine business may be our most important asset and we understand that.”

Stronger network

“It’s going to be difficult for some builders, yes,” McCoy says, responding to a suggestion that with roughly 40 percent fewer dealers, boatbuilders might have trouble getting access to the full market.

By spending tens of millions of dollars to help dealers move inventory during the brunt of the recession, Brunswick was able to strengthen its dealer network, McCoy says. Like many builders, it shifted from a “push” model to a “pull” model. Instead of pushing product onto dealers, the company now helps them stock at minimal levels. Shifting the model-year release from July to September was a big part of that.

McCoy is not surprised that his dealers haven’t been swayed by offers from other manufacturers. An increasing number of builders are owned by private equity firms, McCoy says – investors who buy companies at a good price, add value and then sell.

“Dealers should ask themselves, Do they want to jump on a short-term deal or think about long-term gains,” McCoy says. “We’ve been in the marine business since 1961 and we’re in [it] long-term. It’s just a different model. It looks and acts differently than an investment company. Not that one is wrong – they’re just very different business models.”

The Middle East and fuel

Concern about fuel prices has influenced most builders’ product lineups. For Brunswick, it led to the development of the Zeus pod-drive system, which uses less fuel while getting greater speed per unit of horsepower, McCoy says. The company is continually improving fuel efficiency for its Mercury outboards as well, McCoy says. “We’re doing significant engineering around that,” McCoy says, but declines to go into details.

Brunswick introduced its first fully functional hybrid boat prototype at the 2010 Miami boat show and followed up at the 2011 show with consumers and dealers. Now the company is trying to determine how it will enter that market – “what size boat, what horsepower, etc.,” McCoy says.

“We make engines today that run on diesel, vegetable oil, natural gas,” he says. “The military today builds engines that will burn almost anything. The technology is there. It’s more consumer acceptance and what consumers would actually use.”

McCoy hopes the political turmoil in the Middle East and Northern Africa plays out “in such a way that crude oil prices and natural gas prices don’t spoil what is clearly an economic recovery in the United States.” But, he acknowledges, “It’s clearly a wild card.”

At the same time, businesspeople understand the potential for problems, he says. “We shouldn’t obsess about it. We’ve just got to continue to do business the way we all know how to do business.”

Not an exporter

Brunswick, like many builders, is targeting certain parts of the world – China, India and Russia, for example – that have little recreational boating tradition, but where there now is potential for growth. The industry already is seeing significant increases in activity in places such as Brazil and Argentina, McCoy says.

“The key here is we can’t think of ourselves as exporters in those markets,” McCoy says. “To be successful … you must be sourcing there with local manufacturing, have as local supply chains as you can get, have a local dealer network, and you need to be making product that meets local demand.”

That global dispersion also helps to offset market changes and currency fluctuations, McCoy points out. “Having access to components, raw materials and engineering capability around the world permits us to spread our currency risk,” he says.

Enjoying vertical integration as the No. 1 engine supplier is also a huge advantage, Russo points out. “Is there another builder on the global scene that supplies both the boat and the engine?” he asks. “You could take advantage of that.”

A model show?

As late afternoon approaches, traffic on the show floor begins to thicken. “I’m actually quite upbeat about the amount of traffic I’m seeing here on a Tuesday afternoon,” McCoy says. “I mean, I really am. I’m quite surprised.”

“It’s a big room, so it doesn’t feel crowded,” Russo says, adding that was one of the things organizers appreciate about the Boston Convention Center.

“As you can imagine, I get to go to lots of boat shows,” McCoy says. “It’s a lot like walking into a manufacturing facility – you go in and you get a feel within the first three minutes. This show feels very good.

“There is one very important factor that goes with this show and it’s that you don’t see multiple brands being offered by different dealers,” he adds. “You can go to many shows where you see four dealers in four separate booths with the same brand. [This] could be one of the real market leaders here.”

Dealers who don’t undercut one another has been a 50-year tradition at the New England show, Russo explains. “My dad was one of the founders of the boat show and they just happened to be a group of guys that liked each other,” he says. “They decided way back when they wouldn’t attack each other, and they would keep the show managed to keep predatory dealers out.” That tradition has spread throughout the Northeastern marketplace, Russo says.

This was McCoy’s first visit to the New England show, and he listened attentively as one of his top dealers gave some historical context to the event and his family business. “This is a unique part of the world here for brand exclusivity,” Russo says.

McCoy, having ignored his phone’s alerts too many times, politely pardoned himself to take a call. His sister had received a hip replacement, and he wanted an update. (Her condition was good.)

Making his way back down to the show, McCoy continued to speak in his easy manner. His few hours in Boston were coming to an end. He had flown in from Chicago that morning and was on his way to New York.

“I want to stress that I’m very relaxed the market has hit the bottom,” McCoy says. “The worst is over for the industry and that’s a very important thing – incredibly important. People did not quit boating – they really did not. People who like their boats continue to like their boats.”

This article originally appeared in the April 2011 issue.

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