Brunswick Corp. reported consolidated net sales of $965.5 million, down from more than $1 billion in 2019. Diluted earnings per share for the quarter were $0.88 on a GAAP basis and $0.96 on an as adjusted basis.
CEO David Foulkes highlighted the immense impact the covid-19 pandemic has had on employees. “Brunswick and our employees have responded in many ways, including producing equipment used by first responders, donating PPE to local hospitals and supporting charitable organizations,” Foulkes said in a statement.
The propulsion segment, which includes Mercury, reported a slight decrease for the quarter “as continued strong demand for higher-horsepower outboard engine categories and related controls and systems was offset by weaker sales of lower-horsepower outboards and sterndrive engines, as anticipated,” Brunswick stated.
The parts and accessories segment, now a standalone entity after the purchase of Power Products, reported lower sales and earnings in the quarter, as strong growth at Power Products was offset by lower sales in the other businesses.
P&A performance was affected by stay-at-home orders, which disrupted dealer operations and boating activity toward the end of the quarter at a time when seasonal sales usually accelerate.
Brunswick’s boat group reported a nearly 22 percent decline in net sales against the prior year, due mostly to the temporary suspension of manufacturing in most plants toward the end of the quarter, the company said. That led to an 81 percent drop in GAAP operating earnings, from $27 million to $5.1 million, and a 79 percent drop in adjusted operating earnings, from $29 million to $6 million.
Freedom Boat Club, which is part of business acceleration, contributed approximately 2.5 percent of sales in the quarter, despite some locations being impacted by closure orders.
Operating earnings were also affected by higher retail discount levels over prior year and unfavorable changes in the sales mix, which offset the benefits of cost reduction actions.
“Due to our strong financial profile and healthy balance sheet, we will continue 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,” Foulkes said. “The strategic portfolio actions and cost-reduction efforts executed in the last two years, together with our strong pipeline of new products and successful execution of our capital strategy, position us well to navigate the near-term economic conditions and resume our growth trajectory as we exit the covid-19 economic environment.”
The overarching effects of the macro economy on the marine industry could produce a wide range of possible situations, and the company’s plan for how to approach the rest of the fiscal year involves various assumptions, Foulkes said.
Brunswick anticipates the global marine market will be down significantly in the second quarter of 2020, with declines moderating over the second half of the year.
The company expects full-year unit demand to drop in the high teens or low 20s from 2019 levels, and that wholesale comparisons will be better than retail in the back half of the year due to pipeline reduction, Foulkes said. It also believes P&A will be slightly below 2019 in the second half of the year.
Brunswick expects operating expenses between $525 million and $550 million for the year, representing about a 15 percent decrease from initial 2020 plans “while still preserving all critical product programs that we believe will drive future earnings growth and market share gains,” Foulkes said.
Also, the company completed $34 million in share repurchasing during the first quarter and has suspended repurchases for the rest of the year.
“Our second quarter dividend has been approved and will be paid in June,” Foulkes said. “We plan to reduce debt outstanding by $35 million, consistent with scheduled maturities, and are targeting between $150 million and $160 million of capital expenditures for the year.”
Finally, the company expects a challenging second quarter, Foulkes said. “However, given the strength of our P&A business, the cost actions we have taken or can execute quickly as a result of our highly variable cost structure, and the safe restart of production that is already well underway, we believe that we can operate profitably in the quarter, with positive free cash flow,” he said.
“It cannot be overstated that the level of recovery of the global economy, the resumption of domestic and international boating activity, normalized channel operations, and the absence of significant additional disruption to our global operations will be the most important factors in determining where we ultimately perform versus our current market assumptions,” Foulkes added.
The company’s formal guidance for the year remains withdrawn, however, Foulkes said. Brunswick expects revenue comparisons to trend slightly better than the U.S. retail market performance due to the company’s resiliency of its P&A business.
“We expect operating deleverage to fall between mid-20s and mid-30s percent, allowing us to generate free cash flow in excess of $125 million, which includes the funding of high-priority projects,” Foulkes said. “While we clearly recognize and are responding to the very significant challenges this crisis is presenting, we are encouraged by the fact that the majority of U.S. states now include boating, with some restrictions, in the list of acceptable recreational activities, by the progressive reopening of more boat dealerships, and by recent increases in online activity and lead generation related to our products.”