Brunswick Corporation INVESTMENT CASE
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Brunswick Corporation INVESTMENT CASE Date of writing – March 13, 2018 Important: this text demonstrates how we analyse individual companies. In this Quarterly, we like to share our vision on Brunswick Corporation. The Brunswick share has been part This document was compiled by the fund managers of the Kempen of the GSC portfolio since October 2014 and is now one of our bigger positions. This investment case is also (Lux) Global Small-cap Fund (‘the fund’), managed by Kempen Capital a good example of our committed shareholding. Management N.V. (‘Kempen’). Please also see the declaration and disclaimer at the end of this text We close the case with a number of recent and interesting developments. Each business segment is an important portfolio contributor I DESCRIPTION OF BRUNSWICK ENGINE BOAT FITNESS At present, Brunswick consists of three business units. Below is an overview of the segments as presented at the Brunswick Investor Day on 7 November 2017. The company defines three business segments: Engine, Boat and • Leading brands, market • Several market leading • Leading brands and share position, and installed base brands • Broad relationships in Fitness • Global propulsion and P&A • Presence in growing commercial clubs and markets are growing activitybased, outboard verticals The business segment Engine represented over 70% of the operational profit in 2017 [1]. We further divide this • Strong track record of new boat categories • Positive macro fitness products and innovation • Product white space growth trends business into two components: outboard motors and boat parts/accessories. We consider both components to- • Growth opportunities in opportunities • Growth opportunities with gether as the crown jewels of the company. propulsion solutions and • Profit expancion new product and customer P&A products opportunities with solutions • Highly profitable with improving ROIC Brunswick’s engines, for example, are built in half of all the boats in the US [2]. Together with the Japanese Yama- strong ROIC ha, we estimate that Brunswick holds 70% of the market worldwide. In the boat parts/accessories segment, Bruns- wick is even the biggest player worldwide [3]. Each segment: 1) is a market leader in and attractive market; 2) has profitable growth opportunities; 3) contributes financially; and 4) benefits from our strategy The Boat segment may be big in terms of turnover, but its profitability is small. Its contribution to the profit is the- Overview of the three segments as presented by Brunswick on its Investor Day, 7 November 2017 refore limited, which makes it the smallest segment. As there are clearly synergy benefits between the segments BRUNSWICK CORPORATION \ 1 INVESTMENT CASE History of Engine and Boat, these two together are also referred to as the Marine segment. Finally, Brunswick is also the largest player in the field of commercial fitness equipment with brands such as Life Fit- ness, Hammer Strength, Cybex, Indoor Cycling Group and SCIFIT. We see this segment as an isolated activity, as Brunswick was founded in 1845 in Cincinnati (Ohio) by John Mo- there is little or no overlap with the other two segments. ses Brunswick who emigrated from Switzerland to the US when he was 15 years old. Initially, the company manufactured carria- II HIDDEN VALUE ges, quickly followed by billiard tables. The company has a very The Engine segment has performed extremely well in recent years. The value of this segment together with the Boat rich history and developed various business activities. At a fairly segment is, in our view, practically equal to the value that the stock exchange allocates to the entire company. In early stage in history, Brunswick started producing bowling other words, we think the market currently values the fitness division at zero. balls and Brunswick as a brand is still a household name in this industry. In the first hundred years, Brunswick was also active in The main reason for this undervaluation is also known as the conglomerate discount. Brunswick effectively has two segments (Marine and Fitness) with little or no synergy. The group of investors able to estimate both assets by value making toilet seats, car tires and vinyl records. The last activity is much smaller than the sum of the groups of investors that would be enthusiastic about the individual assets. A was sold to Warner Brothers in 1930, after which the company concrete example is that investors seeking exposure in the growing health and fitness market will certainly be very started to produce refrigerators, planes and later also school fu- interested in Brunswick’s Fitness segment. But in the end, they will probably draw the conclusion that Brunswick is rniture. In 1961, Brunswick acquires the company Mercury Mari- not an interesting investment to respond to this trend as the Fitness segment accounts for less than 20% of Bruns- wick’s operating profit [4]. ne, which is still the basis of its current activities. In the 1980s, For investors who want to invest in a market leader in the Marine segment it’s frustrating to also have to put a lot of Brunswick also became a prominent manufacturer of yachts and time and energy in understanding the Fitness division. In 2017, this feeling was encouraged by a disappointing seg- pleasure boats, with well-known brands such as Bayliner, Boston ment performance. This became particularly clear on 26 October 2017, when Brunswick published its Q3 results. The Whaler, Maxum, Sea Ray and Trophy. The last milestone in histo- Engine segment reported very strong results, where the results for the Fitness segment were well below the expecta- tions of analysts causing the stock price to drop by more than 15% to $49 and below. ry we like to mention goes back to 1997, when Brunswick acqui- red the commercial fitness equipment company Life Fitness from III THE FOUR CENTRAL ELEMENTS OF OUR PHILOSOPHY COLLIDED the private equity company Mancuso & Company for $ 310 milli- ON 26 OCTOBER 2017 on. From this acquisition, Brunswick has been able to become As a long-term fundamental shareholder, we saw an opportunity in this drop on 26 October. The profit warning also the world market leader in professional fitness equipment. came as a surprise to us, but at the same time we considered Brunswick’s core business (Marine) to be very healthy. The problems in the Fitness segment were disappointing, but since we thought Brunswick didn’t get any credits for it VISIT THE WEBSITE OF BRUNSWICK CORPORATION anyway, we looked at the 15% drop as a short-term overreaction. We see this type of reactions happen regularly and as a contrary value investor, we like to use it as an opportunity to buy more As a committed shareholder, we then put our vision for Brunswick on paper and shared it with the company. We main- ly wished for more focus and put in a request to reconsider the portfolio and especially the Fitness segment in it. On BRUNSWICK CORPORATION \ 2 INVESTMENT CASE 13 November 2017, Mark Schwabero, CEO and Chairman of Brunswick visited our Amsterdam office. On this occasion, we discussed our vision on Brunswick once again. Bottom-up investment philosophy based on long-term value IV ADROIT BOARD OF DIRECTORS FUNDAMENTAL In-depth analysis of the business and its management Since the disappointing figures of Q3-2017, Brunswick’s board of directors has been in action. Early December, they announced to close down the loss-making boat brand Sea Ray. We think that’s a good decision, as there hardly see- VALUE We look for a margin of safety between price and value med to be any overlap between Sea Ray and the other Marine business. We generally believe that companies with more long-term focus will perform better. ENGAGED Engaged shareholder having frequent discussions with management On January 30 of 2018, this was met with support from the activist shareholder Owl Creek. In a public letter to Bruns- wick’s BoD, Owl Creek also argued for a separation of the Fitness division. LONG TERM Long-term perspective, not afraid to be contrarian Source: Kempen Capital Management - 2018 On 1 March 2018, Brunswick announced its plans to separate the Fitness division. This segment is expected to become a separate listed company in the first quarter of 2019. We strongly believe that both companies will perform better with the increased focus and that they will be valued higher by the stock market as a result. In our view, Brunswick’s BoD deserves a huge compliment for its decisiveness. V. CONCLUSION In summary, we remain very enthusiastic about the Brunswick stock price. We believe in the power of Brunswick’s portfolio. The company is a market leader in several niche segments. We expect that the focus resulting from the upcoming separation of the Fitness division will lead to an even better executi- [1] Source: Brunswick 10Q’s an 10K 2017 on. In our view, the company is well-managed and the shares of Brunswick are undervalued. We look [2] Source: 2018 Brunswick Marine Product Review – 15 February 2018 forward to the spin-off process in which we are potentially given new and additional opportunities. In [3] Source: 2018 Brunswick Marine Product Review – 15 February 2018 about a year, we are able to decide for ourselves in which company we would like to invest, Marine and/ [4] Source: Brunswick 10Q’s en 10K 2017 or Fitness, and how much we want to invest. BRUNSWICK CORPORATION \ 3 INVESTMENT CASE Disclaimer This document is prepared by the fund managers of Kempen (Lux) Global Small-cap Fund (‘the Fund’),managed by Kempen Capital Management N.V. ("Kempen‘’). The views expressed in this document may be subject to change at any given time, without prior notice. Kempen has no obligation to update the contents of this document.