Boat-Maker Brunswick Looks to Control Costs as Demand Softens

[Serious News]

After two banner years, Brunswick now has to refinance low-cost debt in a higher-rate environment and manage costs as consumers demur on buying high-end toys.

In 2023, recreational boat and engine maker Brunswick Corp. scored its second highest annual revenue ever. Yet the company’s finance chief is somewhat subdued on what’s coming in 2024.

“With all the economics and things going on in the market, I wish I could tell you it felt better than it did,” Chief Financial Officer Ryan Gwillim said of last year’s revenue haul.

Brunswick, a leading maker of recreational power boats and marine engines in the U.S. and globally, this month reported revenue of $6.4 billion for 2023, coming in just behind the $6.8 billion peak set the prior year. The company ended 2023 with nearly $500 million in free cash flow, while its stock was up over 34%. It was a record year, Gwillim said, despite the uncertainties in the economy.

The company, which lowered its guidance for last year twice, is looking to control costs and refinance debt as the industry copes with softer demand and the lingering effects of inventory shortfalls. This year, Brunswick’s stock is down over 10%.

Boat makers were among those companies that saw sales soar as pandemic-weary consumers looked for safe ways to spend time outdoors and splurge on luxury experiences. As consumers become more conscious about their spending, and with interest rates weighing on their wallets, they are finding less money for lavish recreational purchases.

Mettawa, Ill.-based Brunswick, maker of brands including Sea Ray, Bayliner and Mercury, aims to minimize the hit from having to refinance—at higher rates—around $450 million in debt that presently carries a rate below 1%, Gwillim said. At the same time, the finance chief is focused on ensuring the company’s costs align with anticipated business conditions.

Demand is among the biggest uncertainties facing the boat business this year. U.S. boat sales reached a 13-year high in 2020, up 12% from the year before, according to the National Marine Manufacturers Association. More than 310,000 power boats were sold in the U.S. that year, the data show, a figure that dropped to 267,306 in 2022 and then to an estimated 258,000 last year.

Higher costs and interest rates have been deterring would-be buyers, and now, with the prospect of interest rates falling, some shoppers are waiting in hopes of wrangling lower monthly payments, Gwillim said. Brunswick anticipates demand for boats in the U.S. will be flat in 2024.

Brunswick, which sells its products to retailers that make them available for consumers, is working with those outlets to provide promotional financing to try to keep and spur demand. It has also been monitoring prices closely, which across the boat industry were up an average of roughly 20% from 2020 to 2023—around double the normal increase, according to Gwillim.

Roughly every week Brunswick management is meeting to talk about pricing tactics to ensure prospective buyers aren’t shut out of the market. “We are keenly focused on the price for the end consumer,” he said. Spurring retail sales at the start of the year “is an important factor to how the overall year will end up.”

But any company that sells big-ticket discretionary items has been grappling with the affordability equation, as both price tags and interest rates have risen, analysts say. In the boat industry, that has been compounded by inventory disruptions over the past few years as higher demand strained supply chains.

Brunswick is more insulated from price pressures than other boat makers because of its higher-end products and consumer base, said Michael Swartz, a senior analyst covering consumer recreation and leisure stocks at Truist Securities.

“But we’re going to have a period right now where people are kind of sitting on their hands,” he said. “It doesn’t mean that the consumer’s not healthy or feeling better, but they are trying to time the purchase a little better.”

Interest rates are also top of mind for Gwillim given the company’s coming refinancing. The $450 million in senior notes from 2021 carry an interest rate of 0.85%, well below what Gwillim is expecting after refinancing.

“I always joke that I tuck them into a drawer, and hope that people forgot about them, but that’s not how it works,” he said. The CFO will look for the best possible deal, but isn’t going to take unnecessary risks by trying to time the refinancing. “We’re not going to wait until the last minute, just to try to catch a rate decline,” he said. Gwillim is anticipating a rate in the mid-5% to low 6% range, declining to give exact figures.

At the same time, Gwillim says he is working to ensure the company’s cost structure matches the earnings it is planning for. This doesn’t mean pulling investments in products and workers, the CFO said, but looking closely at all company spend, for instance, the timing of investment in certain new products.

Brunswick is always looking to align its cost structure with anticipated earnings, but this is particularly critical when the first half of the year is expected to be more sluggish than previously expected, the CFO said.

“There are tough decisions being made around the company, but it is incumbent on us to ensure that if we think we’re going to be a top-line, $6 billion-plus company, that the cost structure matches that and not something larger or smaller,” Gwillim said.

https://www.wsj.com/articles/boat-ma...ftens-43a1c3ea

[Ratickle]

Doesn't sound good......