Brunswick Corp. stunned much of the marine industry when it announced Dec. 5 that it would seek a buyer for Sea Ray, the iconic brand it has owned for 31 years and that is widely viewed as the cornerstone of the company’s boat group.
The move came after nearly a year of challenged sales in the large fiberglass inboard and sterndrive segments, and about a decade of overall sterndrive declines. Sea Ray also has been operating at a loss for most fiscal quarters since the onset of the Great Recession, SunTrust financial analyst Michael Swartz says.
Brunswick has been strategically focused on reducing the cyclical nature of its operations since the recession, when it recorded a 70 percent loss and saw its boat group stay in the red for several years. Its strategy has included investments in parts and accessories acquisitions — a low-margin but largely recession-proof part of the business. Freeing up cash with the Sea Ray sale is expected to help the company invest in mergers and acquisitions, as well as close pension gaps.
Though Brunswick does not break out sales by segment, company CFO Bill Metzger confirmed to analysts during a conference call after the announcement that Sea Ray was operating at a loss and implied that it had been doing so at least through much of fiscal 2017.
“As we speak today, we expect that we will incur a loss in connection with this sale,” Brunswick CEO Mark Schwabero said during the call, adding that it was too soon to estimate the size of the loss. “It’s not just a question of Sea Ray not coming back. Things around the cruiser business and runabout business — the entire industry has not come back to the levels anywhere near where they were at the prior peak.”
Despite having applied pressure to Brunswick regarding the Sea Ray brand and the sterndrive segment overall since the recession began, financial analysts sounded surprised during the call, with long pauses between questions and hesitant tones in their voices.
The decision to jettison Sea Ray was “very much a surprise,” Swartz said the day after the announcement, “but recent softness in larger boats forced their hands.” It’s “a painful but necessary step for Brunswick,“ Swartz added, as the company seeks to reduce the cyclicality in its businesses, as well as invest in growing segments.
“That’s all positive, but there are somewhat of mixed emotions,” Swartz said. “I’ve had a chance to talk to other people who know the business well; it’s been a problem child for a while. Really, when the larger-boat segment started to slow this year, they had to take another strategic look and ask: Did they want to own it? They had started debating it internally two years ago. It wasn’t new to them, and it wasn’t a rash decision — but it caught everyone off guard.”
Schwabero said the company understands that some stakeholders will find the decision difficult to accept, “but we want to be clear that we will continue to diligently manage Sea Ray through the sales process by executing its business and product plans to support and protect the interests of our employees, dealers, customers and shareholders.”
Those stakeholders include publicly traded MarineMax, Sea Ray’s largest dealer, which accounts for about 55 percent of the brand’s sales.
“Any time a brand as iconic as Sea Ray makes an announcement such as yesterday’s, it could give you pause,” said Chuck Cashman, chief revenue officer for MarineMax. “However, Sea Ray is a strong company with a talented team, and we all know that new owners will acquire a knowledgeable and passionate group of boatbuilders.”
Sea Ray holds a certain nostalgia as a long-term pillar for Brunswick — perhaps even more so than billiards, the business the company was founded on in 1845 but divested in 2014. Brunswick purchased the boatbuilder in 1986 and prized it, even while acquiring and selling off several other boat brands for the more than three decades it held and operated Sea Ray.
As was the case when Brunswick sold its billiards business, and a year later in 2015 when it sold the bowling business it launched in the 1960s, Lazard is acting as investment banker for the sale, which is in its early stages, said Brunswick spokesman Daniel Kubera.
“Brunswick welcomes inquiries from interested buyers and can put them in touch with the specific team at Lazard,” he said. “It is likely that the process will gain momentum in early 2018, with the sale expected to be completed in the first half of next year.”
The sale includes the company’s Sykes Creek and Palm Coast facilities in Florida, its manufacturing plant in Tellico, Tenn., and its Dandridge and Greeneville, Tenn., support facilities that are largely dedicated to, and are currently supporting, Sea Ray production, Kubera said. Sea Ray parts, development and engineering, as well as international operations, also will be sold, as well as the Meridian brand, which has been out of production for several years.
“The specific impact on any plants and facilities will depend on the prospective buyer and an evaluation of their needs and capabilities,” Kubera said. “As far as the Brunswick Boat Group facility in Knoxville [Tenn.], we are evaluating the impact on the BBG support organization, consistent with the execution of our boat strategy. It is likely that there will be modifications to the size and structure of those support groups, but it is premature to speculate on the specific impact until we identify a prospective buyer and understand their needs.”
For years, executives assured investors and analysts that despite challenges in the sterndrive and inboard boat segments, Brunswick was committed to making long-term investments in its Sea Ray brand.
But consumers have continued to favor outboard-powered boats. The 150-hp 4-stroke outboards that Mercury rolled out in 2012 were key to helping Brunswick return to profitability, prompting the company to invest heavily in outboard research and development, as well as in its facilities in Fond du Lac, Wis., to continue building out its outboard platforms.
The result was the introduction of engines ranging from 75 to 115 hp in 2014; its 350- and 400-hp outboards were rolled out in 2015. In 2017, Mercury introduced a new diesel line, 1750 racing sterndrive — the largest to date — and 400R Carbon Edition outboard. Mercury didn’t just focus on engines themselves; it also invested in integrated systems and automation, introducing and enhancing joystick controls, VesselView displays and Skyhook, its virtual anchoring system.
The marine engine business now accounts for nearly half of Brunswick’s overall revenue and nearly 80 percent of its marine revenue.
The company will continue building its sterndrives and inboards in addition to the outboards because it has already invested in the technology, Schwabero said, and the sterndrives and inboards can still benefit its parts and accessories business. For example, in 2015 the company introduced a MerCruiser line that included a tow sport engine, and in the past few years abandoned GM engine blocks and invested in building its own.
“While it is true that the sterndrive market has not fully recovered from the downturn and that the industry is shifting more to outboard power — reflecting the advances within outboards, for which Brunswick remains well positioned to serve and grow with — the sterndrive market remains attractive to Brunswick for several reasons,” Kubera said.
Mercury Marine’s recently developed sterndrive continues to gain momentum in the marketplace, and Mercury serves all OEMs, not only the Brunswick brands that use — or used — sterndrive and inboard propulsion, he said. Also within the sterndrive arena, Mercury has scale and no additional fixed costs now that it has consolidated sterndrive production in outboard facilities at Fond du Lac.
The announcement about Sea Ray going up for sale came a day after the conclusion of Sea Ray’s Yacht Expo, an event in Captiva, Fla., that asks VIP customers to test the newest and largest yachts. For the past few years, Boston Whaler has joined the event as that brand’s models have grown in size and demand. Still, the majority of the customers who attend are Sea Ray owners, and many of the “bought-a-boat” bells ringing were for the yachts 50 feet and larger.
“It’s going to be interesting to see what happens going forward, and to see if people who put deposits down will back out,” Swartz said, adding that some buyers might wonder whether their dealer will continue to sell the brand, let alone support and warranty it. “This definitely goes through your mind if you’re buying.”
Kubera said the timing of the Yacht Expo and the Sea Ray announcement was coincidence.
“If anything, it points to the fact that it is business as usual at Sea Ray,” he said. “As we have stated, during the sale process we will continue to diligently manage Sea Ray by executing its business and product plans to support our dealers and customers, as well as support Sea Ray employees. Our focus remains on professionally, transparently and effectively supporting our employees and our dealer network. We continue to make boats, develop and launch new products and support our dealers and customers as we always have.”
Sea Ray sales in fiscal 2017 accounted for 23 percent of overall sales at MarineMax, one of the largest dealers in the United States.
“Our success depends to a significant extent on the well-being, as well as the continued popularity and reputation for quality of the boating products, of our manufacturers, particularly Brunswick’s Sea Ray and Boston Whaler boat lines,” MarineMax said in an annual report issued Dec. 6.
Any adverse changes in the conditions or operations of MarineMax’s primary manufacturers could adversely affect the quality and quantity of products that its dealerships supply, as well as the services and support they give, MarineMax said, adding: “The failure to receive rebates and other dealer incentives on inventory purchases or retail sales could substantially reduce our margins.”
Cashman remained confident that Sea Ray will continue to thrive and operate as it always has.
“The current models are resonating well with the customers, and our backlog of sold boats is very strong,” Cashman said. “The Sea Ray dealer network — hundreds of thousands of loyal Sea Ray owners and a history of award-winning customer service — certainly adds value to any potential buyer. We are looking forward to the next chapter of this iconic brand.”
Kubera also said he believes the Sea Ray business offers “attractive value creation opportunities” to a new owner. “Sea Ray is an iconic brand that is rich with history, with a reputation for craftsmanship, quality and styling,” Kubera said. “Sea Ray’s manufacturing facilities are among the most advanced in the marine industry, with talented and dedicated workforces.”
Eric Wold, financial analyst at B. Riley, said the value of Sea Ray, given its operating losses, would be “well below the price-to-sales ratio of 1.6 to 1.9 times for public boat companies.”
Tim Conder, senior analyst with Wells Fargo Securities, also raised concerns: “Investors are already asking, given Brunswick’s willingness to divest large boats, which have been viewed as an overhang, would management also consider divesting fitness, which in 2017 has been increasingly viewed as an overhang?”
At the end of the day, Sea Ray had a low return on investment and slower growth than the rest of the business. By sloughing it from Brunswick’s earnings overnight, “it helps all those metrics we look at from a Wall Street perspective,” Swartz said.
“In all but one or two years since the recession, Sea Ray has lost money,” he added, saying that an additional factor in the brand’s troubles was Brunswick laying off 90 workers and furloughing 130 more in Palm Coast this past summer because of continued sluggish sales of larger fiberglass sterndrive and inboard boats.
The layoffs and furloughs “were to align our production levels with market demand in the 40- to 49-foot segment of our business, while continuing to maintain our production capabilities in stronger segments of the business,” Schwabero said at the time.
Swartz wondered aloud whether Brunswick would consider selling the 33-foot-and-below business to one company, perhaps another boatbuilder, and the larger yacht business to another party — which many speculated could be a private equity purchase.
“I think the scale has been the biggest thing that’s hurt them: It’s scaled as if it’s a mass-produced product,” Swartz said. “And for this industry, it is mass-produced. But there haven’t been a lot of opportunities to scale the business,” and a buyer would need to scale the business to make it work.
“This was a very low-margin business,” Swartz said. “From an operational standpoint, it was maybe not as streamlined as some of the others. Some of that might just be because of things Brunswick couldn’t do as a publicly traded company. One of the potential benefits, if Sea Ray gets sold to a private company, there can be some behind-the-scenes blocking and tackling that will improve margin structure, and they don’t have to report to Wall Street every quarter. It could really be a positive for the brand; right now it’s just the unknown.”
Swartz added that despite its financial challenges, Sea Ray remains an iconic brand. “There’s a large customer base,” he said. “The brand has decades and decades of legacy, and a lot of customer loyalty. From an operational standpoint, there’s probably some fine-tuning that needs to be done.”
This article originally appeared in the January 2018 issue.