Brunswick: Revenue growth strong, but below expectations

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Brunswick saw higher third-quarter sales volume in boats with lower average selling prices — such as this 19-foot Sea Ray SPX outboard — than some of the larger fiberglass sterndrive products.

Brunswick saw higher third-quarter sales volume in boats with lower average selling prices — such as this 19-foot Sea Ray SPX outboard — than some of the larger fiberglass sterndrive products.

Brunswick Corp. had revenue of $1.09 billion in the third quarter, missing expectations by about $20 million, due in part to integrating an acquisition on the fitness side of the business, and also due in part to slower international sales of engines.

Investors overreacted to the news, according to industry analysts, as the company’s stock dropped 7 percent Thursday, closing at $43.15 a share. The overreaction was a result of declines in vehicles such as motorcycles and off-road vehicles — something from which the boating industry has been largely insulated.

“Our overall revenue growth was strong, but was lower than our expectations,” Brunswick CEO Mark Schwabero said. “This was mostly due to the fitness segment, where sales of Cybex products have been unfavorably affected by some changes in distribution and decreasing demand for certain products. In addition, in the U.S., sales of certain fitness channels were weak, including retail, as well as local and federal governments. The marine businesses also experienced weaker demand in certain international markets.”

Wholesale shipments were outpacing retail sales, a typical dynamic after strong sales in the first half of the year meant dealers were restocking inventory for the upcoming boat show season, Schwabero said.

“I would say if you look at how 2016 has unfolded, we saw very good growth in Q1, some decent growth in Q2 and then in the back half of the year, it's starting to moderate,” Schwabero told investors and analysts during a conference call Thursday.

“Some of that is a result of what's happening with pipeline restocking efforts. A lot of what's going on there is that lower [average selling price] levels in places where we've got a lot of unit volume, but … it’s not necessarily our highest ASP product.”

“We still consider it to be a very good quarter in line with exactly what we said we were going to do,” he said.

Sales in Europe rose 15 percent and flattened in Canada, edging up 1 percent. Boat sales in Europe increased 13 percent on a constant currency basis, and engine sales were up 7 percent. However, sharp declines in Brazil, the Middle East and Africa took a toll on the bottom line, said CFO Bill Metzger.

Latin America was down 21 percent, and Africa and the Middle East were off 26 percent.

“A lot of times… when you look at a market and say, well, sheesh, it’s only 2 percent of your sales,” Metzger said. “I'm doing this in broad numbers, but when 2 percent of your sales have an area down 25 percent, it's a half a point. And if you look at another area that's down 20 percent, and it’s 4 percent [of sales], well, you have another half of a point. So pretty soon, with some small markets on a global basis, you can get to 1.5 points of total growth pretty quickly.”

“The stock is overreacting badly,” said Jimmy Baker, a senior analyst with B. Riley. “Investors are very concerned boat sales will decline, like we’ve seen in motorcycles and off-road vehicles.”

Boating is somewhat insulated from factors that have sparked declines in those industries, and Brunswick did not miss expectations by much, Baker said. Though the company took margin expectations down slightly, margins are still growing.

“The company actually raised its 2016 earnings expectations — though on slightly lower sales, due to fitness,” Baker said. “The company indicated it remains on target for its 2018 plan, which seems very achievable to us.”

The company raised expectations slightly, with the bottom end of projections edging up from $3.45 to $3.50 a share. “If you go back to a year ago, we told you we were going to be at $3.35 to $3.50,” Schwabero said.

The boat segment's third-quarter operating earnings increased 6 percent, compared with the prior year, Metzger said on the call. Operating margins were 2.2 percent, which reflects a 20-basis-point decrease from last year's third quarter.

“Operating performance in the quarter benefited from higher sales,” Metzger said. “However, the impact of lower sales of large fiberglass sterndrive inboard boats and increased revenue- and profit-enhancing investments mostly offset this benefit for the nine months. Operating margins were 4.5 percent, 80 basis points higher when compared to prior-year results.”

Wells Fargo senior analyst Tim Conder agreed that the markets had overreacted.

“Investors appear incrementally concerned about wholesale above retail [in the second half of the year], with fear of the economic cycle ending,” Conder wrote in a report following the call.

Investors also were concerned about global industry retail tracking below a 3 to 5 percent unit outlook, and reduced revenue and boat margin guidance.

“Reality: Marine wholesale is still catching up to retail, with favorable mix and higher ASPs driving revenue,” Conder said.

Conder also emphasized that wholesale versus retail trends were not a problem.

“We believe investors’ primary concern is higher marine wholesale shipments versus retail and worries related to the economic cycle,” he said. “We would note that wholesale is still playing catch-up year to date,” as U.S. wholesale is up 5 percent, versus retail being up 9 percent, and global wholesale is up 5 percent versus being up 4 percent at the retail level.


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