Brunswick CEO says marine lenders have a big stake in recovery
Banks, like boatbuilders and dealers, are still in retrenchment mode, National Marine Bankers Association president Jim Coburn told an audience at the organization's annual conference, which ran Nov. 8-11 in Hilton Head, S.C.
The banks, he says, are trying to shrink their balance sheets, acquire more capital and improve the quality of their portfolios. In survival mode, "It's hard to be an active participant in lending," says Coburn.
Credit is available, he says, but terms are much more restrictive. "The banks are not going to be dealing in financial gymnastics anymore," he says. "They want good portfolios."
The credit issue was the 900-pound gorilla at the conference, where Brunswick Corp. chairman and CEO Dustan McCoy, the keynote speaker, challenged the bankers to do more to help the industry. Alluding to the tight credit that continues to squeeze boat dealers and consumers, McCoy urged lenders to step up and help the industry recover during the next 12 to 18 months.
"The biggest discussion [among builders and dealers] is about you," McCoy told the bankers. "They want to know what you're going to do about [floorplan] loans - when you're going to show back up [and lend]."
He says demand for consumer loans also is outstripping supply. "Dealers tell us that for every boat they sell, they've got three or four [customers] in the pipeline who they can't get financing for," he says.
McCoy says there are profits to be made by lenders who develop healthy relationships with healthy dealers and manufacturers - emphasis on "healthy" companies with staying power. He says credit is available to Brunswick dealers for floorplanning through Brunswick Acceptance Co., a joint venture between Brunswick and GE Capital Solutions, though with the credit squeeze dealers are facing higher financing costs. McCoy says he would welcome other lenders joining Brunswick in similar partnerships.
Cash is king
McCoy outlined his vision of the industry of the future and says the new, streamlined Brunswick is well-positioned to take advantage of the recovery, when it comes. "Whoever's got cash is ultimately going to be the winner [post-recession]," he says. That's the first rule for surviving, he says, and it has been the core of Brunswick's strategy for navigating this recession.
McCoy says Brunswick's cash balance at the end of fiscal 2007 was $328 million versus $343 million in 2008 and $624 million this year. "We are quite confident where we are today," he says.
Responding to a 40 to 45 percent contraction in the market, Brunswick has slashed fixed annual costs by $420 million, McCoy says.
Brunswick's cash holdings haven't come easily. "We've closed half our factories," he says. "They are closed forever. We shed a third of our brands [across all segments, not just marine]. We stopped building a third of our models."
Brunswick's work force has shrunk from 28,000 in 2008 to 15,000 today.
McCoy says these are the kinds of adjustments builders have had to make to adjust to a drastically shrunken market. In 1965, the industry was selling around 300,000 powerboats, according to McCoy. In 1988, that number topped out at more than 500,000, dropped to about 300,000 in 1992, climbed back to 343,000 in 2000, and was down to less than 300,000 again in 2006, according to industry statistics.
McCoy estimates that number will be around 135,000 this year. He says Brunswick - and others - must figure out how to be profitable at 150,000 to 200,000 boat sales a year, which is where he expects the market to settle for a while. He says he suspects that 200,000 units - down a third from prerecession levels - may be the "new normal" in powerboat sales.
He says Brunswick, the nation's largest boatbuilder, with 16 brands, has restructured so it can make a greater profit at an industrywide volume of 200,000 units sold than it did when the industry was selling 300,000 units a year.
Road to recovery
"There are signs of recovery," Coburn said in his remarks opening the conference, but it is likely to be a slow one. He says unemployment is still rising, and consumer confidence is up and down. Today's best estimates, he says, are for the economy to pick up steam again in late 2010 or early 2011.
Boat sales follow the trend line of light vehicle sales, Coburn says. The auto industry recorded 16.7 million light vehicle sales in first quarter 2007 and 11.5 million in the most recent quarter. It projects that figure will increase to 16 million by the last quarter of 2011. That, Coburn says, augurs well for a gradual improvement in boat sales.
McCoy says Brunswick has tried to protect its dealers by paring production so the company doesn't have to press them to buy boats they can't sell and can't afford to carry in their floorplanning. Brunswick's dealer network started 2008 with 37,000 units in inventory, McCoy says. The company sold 37,000 units to its dealers that year, and the dealers sold 45,000 units, leaving them with 29,000 at year's end. In 2009, dealers started out with 29,000 units, Brunswick sold them 15,000 units, and they sold 30,000, winding up the year with 14,000.
Dealers are starting the 2010 model year with 14,000 units. Brunswick expects to double production and sell 30,000 units to its dealers and, if 2010 is a flat year, its dealers probably will sell 30,000 units and end the year with 14,000 again, he says. "We've never seen that number so low at Brunswick," McCoy says. Inventory control is a new watchword for profitability in leaner times.
McCoy says there would have to be some dramatic changes for the industry to return to prerecession sales levels (around 300,000 units) because consumers have less money to buy boats now - and for the foreseeable future. Their homes and investment funds are worth less, their income has been increasing at about 1 percent a year, more than 10 percent of workers are unemployed, many are paying down debt, and those that aren't paying down debt are saving now - an average 4 percent of their incomes, up from 1 percent prerecession.
That could go from 4 to 7 percent in the next couple of years - one example of new consumer behavior coming out of the recession, says Gina Martin Adams, an economist and equity strategist for Wells Fargo LLC. "This is going to be a very different consumer going forward," she said, one who is value-driven and very cost-conscious.
Are boats too costly?
Meanwhile, the cost of boat ownership is rising - and has been rising - faster than buyer income. The industry is in danger of pricing itself out of business as an "affordability gap" widens - in $50,000 to $300,000, 24- to 40-foot cruisers and offshore fishing boats especially, McCoy says.
Another potential brake on post-recession boating growth: the increase in competition for consumers' leisure time. "We're losing the leisure time battle to soccer," McCoy says.
Builders also need to be aware of changing attitudes among young consumers, who want to be "smart spenders," not conspicuous consumers, and prefer to shop for a value rather than a brand. "Premium pricing for a brand is going to be under pressure," McCoy says. These young consumers have grown up with technological turnover and they value innovation, but it must be innovation that offers real value, he says.
Expect more builders to start selling stripped-down models to hold down costs, National Marine Manufacturers Association president Thom Dammrich said in his address to the bankers. Many of today's de rigueur amenities - flat-screen televisions, full electronics packages, designer styling - will become optional add-ons in the new era, he says.
Yet Dammrich is essentially optimistic about the industry's future. He says participation in boating has increased three years running (2006, 2007 and 2008) despite the recession. And with the U.S. population expected to grow from 300 million to 350 million during the next 40 years, if boating can continue to capture 35 percent participation of the U.S. populace, boats will sell.
"There are tremendous opportunities for growth over the next 40 years," he says, but with this caveat: The industry must start selling boating to blacks, Hispanics and Asians. "We have to reach out to a more diverse audience," he says.
Dammrich says signs of economic recovery are emerging: a 3.5 percent annualized rate of growth in the Gross National Product in the third quarter, a 1.4 percent rise in home prices on a seasonally adjusted basis in the second quarter, and increased auto and recreational vehicle sales. (Boat sales tend to follow RV sales by about six months post-
recession.) He also pointed to the fact that, historically, the time lapse between peaks and troughs in consumer confidence in recessionary times is 26 to 35 months, and October was the 27th month of depressed consumer confidence.
"Sometime in the next three to eight months we'll see consumer confidence turn up," he says.
A healthy uptick in boat sales should follow.
This article originally appeared in the December 2009 issue.