Brunswick 3Q: A closer look at the results

Wells Fargo Securities analyst Tim Conder is keeping Brunswick Corp.’s stock rating at “outperform.”

“The stock appears attractively valued and we believe the stock’s total return will exceed that of the market over the next 12 months,” Conder said in a press release.

The third quarter of 2010 was “one that again saw solid execution from the [Brunswick] management team in an ongoing challenging marine market,” Conder wrote.

Brunswick’s boat sales were up 77 percent in the third quarter, but the company is still working to make adjustments for sharply lagging fiberglass sales and in its effort to meet small-boat demand, which it had underestimated for 2010, CEO Dustan E. McCoy said in Thursday’s earnings call.

Brunswick reported a 22 percent gain in total net sales for the third quarter and an 18 percent increase in marine engine segment sales.

Boat segment

International sales were 34 percent of total segment sales in the quarter, increasing 39 percent during the period. “We are pleased with the growth in marine markets outside the U.S. … with demand in China and Brazil particularly healthy,” McCoy said.

Demand in the Nordic region of Europe also increased and McCoy believes the area is poised for further improvement next year, he said.

Underwriting standards loosened moderately in the third quarter, McCoy said. “Although the boat buyer seems to be more accepting of current market standards, it’s unclear how these factors are affecting new-boat sales, particularly for customers trading up in the larger fiberglass categories,” he said.

Boatbuilding facilities “significantly increased production,” compared with 2009, to replenish dealer inventory. McCoy told analysts and investors that the increase from last year’s low production levels is about 90 percent. Shipments to dealers have increased nearly 60 percent from last year.

Signs of stability in the aluminum segment could be a leading indicator of the overall marine retail industry, McCoy said in the conference call. However, “it appears the consumer remains very reluctant to spend in the higher-priced fiberglass market,” he told analysts.

Marine engine segment

Sales were higher across all of the segment’s main operations, including a high-single- digit increase in the domestic marine service, parts and accessories businesses, which represented 32 percent of total segment sales in the quarter. The segment’s sterndrive engine business showed the greatest percentage of sales growth.

“Our engine folks in global teams are being very successful,” McCoy said. “We’re taking market share in every region, actually. A good bit of it is in government business and commercial business, where we haven’t been well-focused before, and we’re also making penetration in a few recreational markets.”

Distribution

Brunswick continues to focus on the health of its dealer network, McCoy said. “We believe our distribution system is by far the strongest in the industry,” he said. “We’re continuing to work with dealers to make sure they have products that excite customers … and the tools and services that allow them to effectively operate and grow their businesses.”

The company has been working with dealers to determine the “minimum stocking level” for each showroom, which varies by region and dealership, McCoy said.

The feeling is that the minimum stocking level is 15,000 units, McCoy said, adding that this is a “really low number, compared to anything we’ve ever had, but because of the very low retail demand now the arithmetic will say that weeks on hand will increase. But we are very comfortable with that 15,000 as a minimum stocking level going forward.”

In moving to more of a just-in-time production schedule, in which wholesale is closely aligned with retail sales, Brunswick underestimated small-boat demand, McCoy said.

“When we went to this model, we said we probably wouldn’t get it right the first couple of years,” McCoy said. “As we’re ending 2010 and as we go into 2011, we’re putting more smaller boats into the system so that [when a] customer … walks into the dealership and says, ‘I want a boat and I want to buy it now,’ dealers will have them.”

“That’s one mistake we made as we went into 2010 and that’s one correction we’re making as we move into 2011,” he added.

— Reagan Haynes