Tariffs, Schwabero retirement are main topics of Q3 call

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Brunswick Corp. expects a $60 million to $70 million gross impact and a $30 million to $35 million net impact in 2019 as a result of tariffs — assuming the tariffs on China stay in place — with about two-thirds of that coming from 40- to 60-hp engines that the company manufactures in that country.

Brunswick applied for an exemption, since its competitors manufacturer engines in Japan and aren’t subject to the tariffs. However, the company has no timeline for when that might be granted or denied, CEO Mark Schwabero said on a call to discuss third quarter results.

“We have raised prices in response to cost pressures, particularly in pontoon and aluminum fish products,” Schwabero said. “Overall, we are developing plans to offset about half of the tariff cost in 2019, resulting in a net $30 million to $35 million negative impact to full-year earnings.”

The company will use a combination of price increases, supply chain management and supplier negotiations, and other cost efficiencies to offset the tariff impact. “[Brunswick] will continue to look for additional ways to mitigate the tariff effects as we move throughout the year,” Schwabero said.

“We've got a very fresh product lineup with a superb new offering that we've just come out with this year,” CFO Bill Metzger said. “We certainly feel like we're in a position where we can pass along pricing to the extent we need to.”

Canada’s retaliatory tariffs on boats imported from the United States negatively impacted third-quarter sales, Schwabero said, but the company is assuming the new United States-Mexico-Canada Agreement will result in those being removed.

“In Canada, strong retail continues to drive growth, and it's outpacing wholesale,” Schwabero said. “We are planning for the second half wholesale boat demand to slow substantially as dealers delay off-season stocking orders of boats imported from the U.S. due to the retaliatory tariffs. Currently, a little more than half of the boats we sell annually in Canada are imported from the U.S., with the remainder sold by our Québec-based Princecraft brand, which remains well positioned to serve this market.”

Brunswick beat expectations almost across the board, particularly in the engine segment, which accounted for 60 percent of sales and 80 percent of profit.

Propulsion revenues were up 24 percent in the quarter. “Mercury outperformed the industry figures by a wide margin, taking share as a result of the freshest lineup of outboard engines in the industry,” Schwabero said.

Mercury is adding capacity because it still expects demand to outpace production into 2019, despite a midteens percent increase in production of engines greater than 75 hp.

“I think we're capitalizing on quite a bit of market opportunity,” Metzger said. “I think there's probably additional things that we can do as we bring more capacity online, but we're certainly keeping up and then some relative to what demand is.”

Concerns about tariffs and cost pressures have “hijacked the narrative of this earnings season,” said SunTrust analyst Michael Swartz.

“While Brunswick is clearly not immune to these issues, we view today's reaction as a case of failing to see the forest through the trees,” Swartz said.

B. Riley analyst Eric Wold agreed that shares are being undervalued by investors.

Schwabero also discussed his retirement, announced Thursday, during the call.

The company will be laying out its three-year strategy at the Miami International Boat Show in February, and Schwabero said he believes it’s a “real inflection point.”

“The person who is going to lead the marine business going forward for the next couple of years should really be someone who is there and involved and really driving that process, rather than worrying about some other change happening down the road,” Schwabero said.

Investors appeared surprised by the retirement announcement, as it was “not well telegraphed,” said Wells Fargo analyst Tim Conder.

Chief technology officer David Foulkes will take over as CEO in 2019.

“David is a known entity. We've worked together 10 years,” Schwabero said. “He's been in the corporate office for a year-and-a-half now as CTO, interacting with peers and staff. He's been running the boat business for the last six months and will continue through the end of the year. I think David is a great guy to take that strategy going forward, and I think it's just a natural place for me to step off and leave the management in great hands.”

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