Brunswick Corporation (BC) CEO Dave Foulkes on Q1 2020 Results - Earnings Call Transcript

Brunswick Corporation (NYSE:BC) Q1 2020 Results Earnings Conference Call April 30, 2020 8:00 AM ET

Company Participants

Ryan Gwillim - Vice President of Finance and Treasurer

Dave Foulkes - Chief Executive Officer

Bill Metzger - Senior Vice President, Chief Financial Officer

Conference Call Participants

James Hardiman - Wedbush Securities

Joe Altobello - Raymond James

Scott Stember - C.L. King

Craig Kennison - Baird

Tim Conder - Wells Fargo

Gerrick Johnson - BMO Capital Markets

Mike Swartz - SunTrust

Operator

Good morning and welcome to Brunswick Corporation's first quarter 2020 earnings conference call. All participants will be in a listen-only mode until the question-and-answer period. Today's meeting will be recorded. If you have any objections, you may disconnect at this time.

I would now like to introduce Ryan Gwillim, Vice President, Finance and Treasurer.

Ryan Gwillim

Good morning and thank you for joining us. With me on the call this morning are Dave Foulkes, Brunswick's CEO and Bill Metzger, CFO.

Before we begin with our prepared remarks, I would like to remind everyone that during this call, our comments will include certain forward-looking statements about future results. Please keep in mind that our actual results could differ materially from these expectations. For the details on the factors to consider, please refer to our recent SEC filings and today's press release. All of these documents are available at our website at brunswick.com.

During our presentation, we will also be referring to certain non-GAAP financial information. Reconciliations of GAAP to non-GAAP financial measures are provided in the appendix to this presentation and the reconciliation sections of the consolidated financial statements accompanying today's results.

I would now like to turn the call over to Dave.

Dave Foulkes

Thanks Ryan and good morning everyone. Before we start this morning, I would like to take a minute to recognize the immense impact that the COVID-19 pandemic has had on our employees, our business partners and the communities in which we operate. Brunswick has taken many steps to help those who interact with us on a daily basis, endure during these times and prepare for the resumption of more normal activity. I couldn't be more proud of our over 12,000 global employees for navigating through this dynamic environment, juggling family life with work and for staying positive despite everything going on in the world around them.

To support our employees, we implemented prompt, coordinated production shutdowns and recently, progressive orderly restarts, instituted a wage continuity program and we are quick to mandate work from home policies. As our employees return to work in many locations across the globe, we have instituted many health and safety measures including temperature screening, enhanced PPE and distancing procedures and have completed deep cleaning processes in order to provide a safe environment in which our employees can work productively.

We know this is a difficult time for our dealers, suppliers and other business partners. To enable our dealer network to continue servicing their customer base, we have kept open our global distribution business which delivers critical parts and accessories, same or next day. We have also worked with our floor-plan lenders to extend interest and curtailment payment terms during a time when many product showrooms are closed. Finally, we are working with our supply base to match purchases with production needs and ensure a smooth production ramp up.

Lastly, we have responded to the needs of our communities in the fight against the virus. We have donated PPE to local health care facilities in many areas in which we operate and are producing pumps, electrical equipments and masks to be used by first responders and others dealing directly with the fight. We are also supporting charitable organizations that are providing support on the front lines.

The COVID-19 pandemic has materially impacted our business operations around the world. In the U.S., we temporarily suspended manufacturing at most of our engine and boat facilities on March 23 as states implemented stay at home guidelines. Our prompt decision to suspend production ensured the health and safety of the affected employees and allowed us to rebalance inventory levels with anticipated reduction in near term demand.

On April 13, we resumed partial operations at Mercury's facility in Fond du Lac and at Boston Whaler and have opened additional facilities in the last two weeks. As of today, all our major U.S. manufacturing facilities are back online with new temperature screening, distancing, PPE and cleaning protocols.

Approximately 80% of our dealer network is open in some capacity, including providing service, with a large majority of these dealers having the capability to take orders and sell boats and engines to their customer base. Enabled by our distribution businesses, which have continued to operate, these dealers, with some limitations, are able to get boats in the water during a busy time in their season and get people out on the water.

Boating is still allowed and even encouraged with some operating limitations in most parts of the country and remaining restrictions are easing, creating more opportunities to boat given the generally better weather conditions versus the unseasonably cold and wet 2019 spring. Freedom Boat Club has also been affected as many locations were closed during April due to local stay at home orders. However, company-operated locations plan to reopen on May 1 with new measures in place to protect employee and member health. And we have been focusing on generating excitement with prospective new members, resulting in a recent acceleration in membership growth.

Outside the U.S., all global manufacturing facilities will have resumed production by May 4, aside from one U.K. facility. Our Belgium distribution hub has remained open and is supporting our dealer network across the continent. And our boat manufacturing operations in Portugal and Poland have resumed production and are delivering boats.

Our small horsepower engine manufacturing facilities in China and Japan remain open, although the Suzhou, China facility closed for three weeks around the Chinese New Year as the country was dealing with the initial COVID-19 impacts. Our Chinese supply base, which accounts for less than 10% of our cost of goods, is also fully operational and supplying components to all our global locations.

Our distribution operations in Canada and Asia-Pacific are also operational. We reopened our advanced systems group production operations in New Zealand this week and we plan to reopen our Princecraft production facility in Canada on Monday, in addition to our boat production facility in Reynosa, Mexico. All our global facilities are using the same new health and safety protocols.

In Europe and Australia, New Zealand, many of our dealers and boat OEMs, which have been closed since mid-March, are now starting to reopen as countries relax shelter restrictions. We were pleased to see Australia and New Zealand recently announcing some relaxation of boating restrictions.

In light of lower near term demand for our products, we have taken certain cost measures to adjust our spending levels to match lower revenue targets. Recall that 2020 is already benefiting from the $50 million of structural cost reductions implemented in 2019. We have furloughed production and salaried staff directly affected by the suspension of production. We also instituted a salaried workforce hiring freeze and canceled annual merit increases for salaried employees. In addition, we have suspended or delayed lower priority capital projects and curtailed discretionary spending.

These measures are contributing to a roughly 15% reduction in operating expenses versus originally forecast expenses for 2020. Given our highly flexible and variable cost structure, which Bill will discuss further in a few minutes, we have the ability to make additional expense reductions later in the year should economic conditions necessitate.

We are also benefiting from prudently managing our capital structure. We ended the first quarter with approximately $515 million of cash on hand, including proceeds from our fully drawn revolver. We expect to maintain sufficient cushion against our debt covenants and continue to monitor and execute on opportunities to bolster liquidity. Given the retail bond issuances undertaken after the Power Products acquisition, our maturity profile has been greatly extended with no significant long term debt maturities until 2023.

We completed $34 million of share repurchases in the first quarter prior to suspending activities in early March. However, we are not planning any additional repurchases for the remainder of the year due to the current business outlook. Our second quarter dividend has been approved and will be paid in June.

Finally, we have reduced our capital expenditures for the year from over $200 million to between $150 million and $160 million. The remaining spending is largely in support of new product programs and digital initiatives that will drive future earnings growth and market share gains and which we have protected in our actions to-date. We do have the opportunity to further reduce spending if it becomes necessary.

Our first quarter performance demonstrated the robustness of our marine-focused portfolio despite the unprecedented disruption of the global economy resulting from the COVID-19 pandemic, particularly in the latter part of the quarter. Prior to the progression of global shutdowns that began in March, our businesses were performing in line with expectations with sales and earnings consistent with our plan provided at the beginning of the year.

The U.S. retail marine market exhibited strong demand trends. Mercury continued to gain significant share in outboard propulsion and our parts and accessories businesses remained steady with outperformance of Power Products. Our premium bulk brands, led by Boston Whaler and Sea Ray, leveraged strong early season boat shows into success at retail and Freedom Boat [indiscernible] and recorded some of its busiest weekends in the history of its operations.

The COVID-19 pandemic had a material impact on our results in the quarter, primarily due to lower revenues stemming from the suspension of production at many of our manufacturing facilities, almost all of which, as I mentioned, resumed production in April. However, our global distribution businesses continued to operate and we were able to offset half of the earnings impact of the production shutdowns through austerity measures and operating expense control. This enabled us to generate operating margins consistent with prior year, demonstrating the resiliency of our businesses in an extremely challenged market.

Next, I would like to review the sales performance of our segments by region on a constant currency basis, excluding acquisitions. In the U.S., total revenues were down 11%, while international sales in total were down 2%. International markets remained relatively resilient despite the pandemic and we are seeing more bright spots as countries begin to relax or exit stay at home orders.

Revenue performance for most regions was affected by the pandemic, particularly in our North American boat operations. International sales benefited from strong performance in Asia-Pacific, particularly in higher horsepower engines and commercial applications.

This table provides some color on the performance of the U.S. marine retail market. In the first quarter, which comprises less than 20% of the total sales volume for the year, retail trends were exceeding expectations prior to the COVID-19 pandemic. The strong performance in January and February, which make up less than half of the volume in the quarter, was offset by slowness in March resulting in industry unit volume for the main powerboat segments being flat for the quarter versus 2019. Note that less than half of the states reported March figures, meaning this number is likely to be revised as we move through the second quarter.

As expected, outboard product continues to outperform sterndrive, inboard, with outboard product representing more than 90% of boats sold today. Outboard engine unit registrations were down 5% in the quarter, but registrations for engines over 175 horsepower were up over Q1 2019 and Mercury significantly outperformed the market in these high horsepower categories. We don't yet have complete information on April, but we believe retail performance is slightly better than initially anticipated.

In addition, based on information from our banking partners and internally through our Bluewater Finance business, applications for retail financing have been healthy in April, with applications similar to or recently higher than in 2019. Bill will offer some additional comments on our outlook for the remainder of 2020 later on the call.

I will now turn the call over to Bill for some additional comments on our financial performance.

Bill Metzger

Thanks Dave and good morning everyone. For the first quarter, net sales were down 8%, while operating earnings on an as adjusted basis decreased by 10%. Adjusted operating margin stayed relatively consistent with prior year at 11.7% as austerity measures and operating expense control offset the impact of lost sales volume and other costs and charges incurred in response to the pandemic. We finished the quarter with an adjusted EPS of $0.96 per share, up 2% year-over-year, primarily due to lower shares outstanding.

Before I review segment performance in the quarter, I would like to remind everyone that this is the first quarter we are breaking propulsion and parts and accessories businesses into two reporting segments, consistent with the discussion on the January call.

Starting with the propulsion segment. Revenue was relatively consistent with Q1 2019 as continued strong demand for higher horsepower outboard engine categories and related controls and systems was offset as anticipated by weaker sales of lower horsepower outboards and sterndrive engines. As Dave mentioned earlier, we continue to gain substantial market share in higher horsepower engines, especially in saltwater markets as demonstrated by our record share performance at the Miami Boat Show in February.

Mercury was able to leverage its distribution capabilities and existing inventory to continue shipments of engines to meet demand through the end of the quarter and beyond. Adjusted operating margins and operating earnings were up slightly in the quarter, including benefits from cost reduction activities and a more favorable sales mix. The impact of these items exceeded increased costs resulting from COVID-19 disruptions, including the temporary suspension of manufacturing and the impact of unfavorable changes in foreign exchange rates and tariffs.

In the parts and accessories segment, revenues were down 4% and operating earnings were down 3% versus 2019, as strong sales growth at Power Products was offset by lower sales in the other businesses. This performance was affected by stay at home policies, which disrupted both dealer operations and boating activity in many locations towards the end of the quarter at a time when seasonal sales are usually accelerating.

The boat segment's revenue and earnings were affected by the temporary suspension of manufacturing and shipping in substantially all plants towards the end of the quarter. Segment revenues were lower by 22% or approximately $80 million, exceeding planned reductions. Adjusted operating earnings were down $23 million, reflecting the impact of lower volume, along with higher retail discounts versus the prior year and a less favorable sales mix, which exceeded benefits from cost reduction activities.

Our premium brands continue to perform strongly at retail, including Boston Whaler, the market leader in the saltwater fishing category. Comparisons between years reflect the impact of manufacturing disruptions and the ramp up of production of new models in 2020 versus a very strong first quarter in 2019. As we have referenced on previous calls, Boston Whaler has launched substantial upgrades to both Advantage and Conquest product lines, which have been extremely well received by dealers and retail customers.

Freedom Boat Club also had another strong quarter, contributing more than 2% of sales in the quarter with strong operating margins. Dealer pipelines ended the quarter with 39 weeks of boats on hand, measured on a trailing 12-month basis, with units lower by 11% versus the first quarter of 2019. As a result of short term disruptions in demand and production caused by COVID-19, we are planning to manage Q2 production levels substantially lower and advance to the model year changeover, which we may move forward for certain brands.

Our pipeline and earning projections for the year-end assume dealer inventories will be positioned to accommodate improvements in forward-looking demand. This will likely cause our weeks on hand measured on a trailing 12-month basis to exceed prior year levels at year-end. While this trailing metric may be higher, inventory levels will still be reduced versus year-end 2019 by a low double digit percentage and will be appropriate for improved demand moving into 2021. Our wholesale shipments and pipeline assumptions are obviously dependent upon how retail activity evolves and we will adjust production and stocking levels as required.

Projecting the demand environment and operating results for the remainder of 2020 involves a high degree of uncertainty. There are still many unanswered questions, including the progression of current pandemic, the response of countries and states and the resulting impact on the macro economy. These factors will ultimately influence performance of the marine market and the global consumer.

In response, our businesses have been preparing for a range of scenarios and our plan for the remainder of the year is based on the following assumptions: We anticipate that the global marine market will be down significantly in the second quarter of 2020, with declines moderating over the second half of the year. We project U.S. marine industry retail unit demand for the full year to be down high teens to low-20s percent from 2019 levels. We are assuming that wholesale comparisons will be better than retail in the back half of the year due mostly to the pipeline reduction actions executed in the second half of 2019. We believe that sales of parts and accessories in the second half of 2020 should be slightly below 2019 levels, assuming boat usage returns to more normal trends with the aftermarket portion of the business performing at or slightly above prior year. At this level of demand, we are planning for operating expenses of between $525 million and $550 million for the year, which preserves funding for all critical product programs that we believe will drive future earnings growth and market share gains.

For the full year, although our formal guidance remains withdrawn, we would anticipate revenue comparisons to trend slightly better than U.S. retail marine market performance, primarily due to the resiliency of our P&A business. We expect operating deleverage to fall between mid-20s and mid-30s percent, allowing us to generate free cash flow in excess of $125 million, which includes the funding of high priority projects.

While the second quarter is expected to be challenging, we anticipate to operate profitably and generate positive cash flow. This incorporates the strength of our P&A business, benefits from cost actions and the continued safe startup of production as well as other demand factors previously discussed. It cannot be overstated that the level of recovery of the global economy, the resumption of domestic and international boating activity, normalized channel operations and the absence of significant additional disruption to our global operations will be the most important factors in determining where we ultimately perform versus our current market and operating assumptions.

I would also like to make a few comments about our cost and margin structure, which is definitely a critical advantage in this period of uncertainty. During the global financial crisis, we substantially lowered our fixed cost structure, which we have continued to manage prudently over the last 10 years. We have also elevated our variable margins through a series of successful new product investments and operational excellence initiatives. This puts us in a strong position as we operate during this crisis.

Our current fixed cost base totals approximately $800 million, measured on an annual run rate basis or $200 million per quarter. This includes the austerity actions Dave referenced earlier. It also includes a healthy level of R&D spending of approximately $120 million as we plan to continue to strengthen our competitive position by investing in new products across our portfolio. This cost structure positions our run rate breakeven point at approximately $2.7 billion to $2.9 billion in sales, assuming the P&A business is less affected by the current demand shock. It is important to note that we have additional flexibility to manage this cost structure substantially lower if required and we are aggressively evaluating actions to implement incremental structural actions to further strengthen our cost position.

I would now like to deconstruct our operating leverage assumptions, which will be affected by the following, the composition of our volume reductions, certain operating factors and actions to lower fixed costs. We anticipate operating deleverage between 25% and 35%. This assumes, based on variable margins, that our segments deleverage due to volume in the range of low-20s up to mid-30s percentage, with P&A at the high end of the range, propulsion in the middle and boats towards the lower end of the range. I would note that each segment could experience some variability from these estimates due to product and customer mix.

There are a number of operating factors that we anticipate will unfavorably impact leverage on an overall basis. Headwinds include unfavorable absorption due to lower production, foreign currency, tariffs and COVID-19 related costs. There are also several other factors positively affecting comparisons, including pricing, efficiency initiatives and commodities. The unfavorable impacts of these cost factors are being mitigated by reductions in SG&A versus 2019 of $50 million to $75 million. As I mentioned earlier, we are continuing to evaluate actions to flex spending lower if required, including structural cost reduction actions.

Our current liquidity position is very strong and is an area of great focus. Our liquidity planning is influenced by several factors, including our cash position, our ability to generate free cash flow and retain full access to our revolving credit facility as well as our debt repayment and planned dividend requirements. We anticipate having total liquidity of over $500 million at the end of the second quarter and between $650 million and $700 million by year-end.

We ended Q1 with cash balances totaling $515 million versus approximately $330 million at year-end. This reduction includes free cash flow usage in Q1 of $144 million and proceeds from the $385 million of borrowings under our revolving credit facility. Q1 has always been a period of free cash flow usage, mostly due to seasonal working capital needs, including increases in accounts receivable and inventory as well as payment of the previous year's variable compensation accruals. I would point out that our free cash flow performance in Q1 was improved versus 2019. Our free cash flow projections for the remainder of the year assumes favorable seasonal working capital trends and positive earnings with Q2 being the most challenging period.

The level of borrowing capacity under our revolving credit facility is tied to both a leverage test and an interest coverage test. These covenants also pertain to our wholesale financing JV with Wells Fargo Distribution Finance. Based on our anticipated earnings generation throughout the year and assume the revolving credit facility is fully drawn, we have sufficient cushion versus these tests.

I will conclude with an update on certain items that will impact our P&L and cash flow for the remainder of the year. Aside from the free cash flow number I just discussed, most of these estimates have not changed or have changed only slightly since the January call.

We expect to use between $40 million and $60 million of working capital for the year, incur between $115 million and $120 million of depreciation and amortization. Our effective tax rate is estimated to be between 21% and 22% for the year, with a cash tax rate anticipated to be in the low double digit percent range. Our average shares outstanding figure is now 80.3 million shares, taking into account the shares repurchased in the first quarter.

We have already commented on most of the capital strategy assumptions on this slide, which have been adjusted in response to the uncertain environment. Two items are still worth noting. First, as Dave mentioned, we will pay our upcoming quarterly dividend of $0.24 per share, which is unchanged from Q1 levels. This decision is enabled by our strong financial position and consistent with our policy objective of sustaining our dividend through an economic cycle. We will continue to evaluate our dividend policy on a quarter-by-quarter basis as the business environment unfolds throughout the year. Second, our net interest expense estimate of $70 million reflects higher borrowings under our revolving credit facility. We have the ability to repay all or a portion of this facility towards the end of the year, depending upon liquidity requirements.

I will now turn the call back to Dave to continue our outlook comments.

Dave Foulkes

Thanks Bill. Although we find ourselves in a challenging operating and economic environment, our businesses are still executing well against our operating and strategic priorities. The health and safety of our employees as we restart and continue to operate our businesses, of course, continues to be our priority across the enterprise. Amongst the top priorities for our propulsion segment, is continuing to expand market share, especially in the greater than 175 horsepower category, enabled by the added production capacity now online for higher horsepower engines with mix improvements arising from our ability to satisfy greater levels of demand in dealer, repower and international channels.

Optimizing production and controlling costs through this period of uncertainty is, of course, a priority. However, we also remain focused on further developing exciting new products and technologies for our engines and related control systems that will enable top line and earnings growth into the future. Finally, we remain committed to delivering improved technology and performance in our sterndrive/inboard lineup of engines. These products serve a smaller yet loyal customer base and it remains our goal to retain our market leadership position in this category.

Turning to our parts and accessories segment. Our primary objectives remain relatively unchanged. We anticipate boat usage continuing to be strong even with social distancing measures continuing into the future. As a reminder, our P&A business is 75% aftermarket based and is well equipped to perform in challenging economic conditions as boaters continue to use their boats and generate the need for consumables and replacement parts. Power Products, which is part of the advanced systems group, continues to be the market leader in electrical systems and products and is performing well even in these difficult conditions.

Our systems integration business continues to provide growth opportunities as boat OEMs face increasing technical complexity and seek to focus on the differentiating elements of their products. Our global distribution network provides quick and efficient access to our breadth of P&A products, delivering to thousands of points of sale across the globe. This business is an excellent channel for our P&A products and provides OEMs, dealers and consumers with a one-stop shop and the ability to efficiently manage inventory levels.

Finally, the advanced systems group, which includes Power Products and Attwood group of businesses, was formed with the objective of optimizing our operating model in this area for both cost and growth. Finally, our boat segment will continue to focus on launching profitable new products focused particularly in its premium brands, while following its road map to improve operating margins across the portfolio.

As Bill discussed earlier, revenue levels in 2020 will be influenced by the level of retail activity over the remainder of 2020 as well as our outlook for 2021. We will continue to monitor market demand and adjust our production plans as necessary to manage pipeline inventories. We will also continue to expand Freedom Boat Club and execute against its strategic growth strategy. We have added 15 locations thus far in 2020, bringing the number of locations to 225 and anticipate adding more locations in 2020 and continuing to capitalize on our synergy opportunities.

In closing, despite the substantial near term challenges facing our business, we remain confident in our overall strategic plan, industry-leading technologies, market-leading brands and in the health and resilience of marine consumer. Our strong aftermarket businesses, highly variable cost structure, strong cost discipline and operating capabilities and adaptable capital strategy position us to generate earnings and cash flow throughout the remainder of 2020. Each of our businesses is maintaining flexibility to balance production to meet market demands allowing us to capture upside should demand be greater than anticipated.

The strategic portfolio actions and cost reduction efforts executed in the last two years together with our strong pipeline of new products and successful execution of our capital strategy position us well to navigate the near term economic conditions and resume our growth trajectory as we exit the COVID-19 economic environment. The environment this year is substantially different than what we had planned for back in January. But given our solid strategic plan and strong financial position entering this crisis and our track record of taking quick and decisive actions as economic conditions change, we are confident that we will exit the year with momentum and a focus on continuing to generate significant shareholder value in 2021 and beyond.

While we clearly recognize and are responding to the very significant challenges this crisis is presenting, we were encouraged by the fact that the majority of U.S. states now include boating with some restrictions in the list of acceptable recreational activities, by the progressive reopening of more boat dealerships and by recent increases in online activity and lead generation related to our products.

Lastly, on behalf of myself and the Brunswick team, I would like to send heartfelt best wishes to those most affected by COVID-19, including those fighting and recovering from infection and the first responders, healthcare workers and essential employees on the front lines. Brunswick will continue to do our part in helping our communities persevere through and ultimately recover from this crisis.

I will now open the line for questions.

Question-and-Answer Session

Operator

[Operator Instructions]. Our first question comes from James Hardiman with Wedbush Securities. You may proceed with your question.

James Hardiman

Good morning. Thanks for taking my call. So I was hoping you could hone in a little bit on the April commentary. I think MarineMax talked about April being up last week and, at least more recently, it sounds like things are maybe turning up a little bit for you guys. I guess, maybe just speak to how that's even possible in the current environment? And then within the context of your broader guidance, I know you don't have technical guidance, but you have given us a lot of building blocks, most notably that retail is going to be down high teens, low-20s. I am assuming that that presumes that the April sort of relative strength is not sustainable? How should we think through that?

Dave Foulkes

Yes. Hi James, it's Dave here. April has clearly been a month of two distinct halves for us. The first half was a little more like the end of March. Right now, it is the first time that we have kind of seen all of the indicators pointing in a positive direction. We certainly have seen good leading indicators on the loan applications, which are up substantially recently versus last year. And certainly, we are getting more pull from dealerships, I would say, particularly at the premium end of the marketplace. So yes, I would say the last kind of week-and-a-half have been significantly different.

Obviously, we are excited about that trajectory. We are hoping that it's sustainable. But we are not completely sure. Obviously, there are a number of things that could happen. Is it fully? No, that trajectory is not fully built into the full year guidance that we provided. I think our full year guidance is much more of a balance between what we have seen over a longer recent period.

James Hardiman

Okay. That's helpful. And then is there any way to think about, I mean, again, you have given us how to think about the industry for the year, right, high teens, low-20s. Any way to think about Q2 within that? Presumably, Q2 is going to be significantly worse than that. But how are you thinking about just how far Q2 could fall before we presumably work our way back up in the back half of the year?

Bill Metzger

Yes. James, I guess I will take that. When I think about it, if you look at March as a kind of a benchmark, March SSI down mid teens. Assuming the trends and some of the factors that affected March are more prevalent throughout the course of the month of April, the way I think about it is, is that it's quite possible that April will look more like two times the reduction that we saw in March. But that's very much of a guess on my part. And I think a lot of what we are seeing is very much of a leading indicator, which should start to benefit, I think, May and June. And just I think everybody needs to be careful with all of the disruptions associated with shelter at home. There's got to be some impact on the registration process. So I would expect that reporting to be extremely choppy in the next month or two.

James Hardiman

But just to be clear and I apologize. But just to be clear, if I am thinking about first quarter being pretty flat and then April being down, call it, 20%, it sounds like to get to 20% for the year, you wouldn't be factoring in any improvement during the remainder of the year from a retail perspective. Am I thinking about that the wrong way?

Bill Metzger

I think you have to factor in the dynamics of March with half of the states reporting, James, were down mid teens. There's another half of the states that are likely going to trend the same way. So I think with March being flat right now, in all likelihood when it gets revised, it's going to be revised lower, would be my guess.

Dave Foulkes

And the quarter was flat.

Bill Metzger

And the quarter was flat.

Dave Foulkes

But March was down, as Bill said, mid teens. So that if you double that, that doubling of the mid teens down is what we think April would look like.

James Hardiman

I see. And then things presumably getting somewhat better from there?

Bill Metzger

Correct.

Dave Foulkes

Correct.

James Hardiman

Got it. Okay. Thanks guys.

Dave Foulkes

Thanks James.

Operator

Thank you. Our next question comes from Joe Altobello with Raymond James. You may proceed with your question.

Joe Altobello

Thanks. Hi guys. Not to kind of hone in on your dealer base and maybe the health of your dealers. I mean, obviously MarineMax being your largest. But beyond that, some of the more smaller dealers that you sell through, any sense for how their financials are looking and how their liquidity situation is looking?

Dave Foulkes

I think we are broadly in pretty good shape. We have still extremely low levels of concern, I would say. And dealer sentiment is certainly, over the last week or two weeks trending more positive. I think that more recently we are seeing kind of mid-80% of dealerships open. Many, many dealers have maintained service and maintenance operations, kind of curbside pickup, online sales and those kind of things.

So I would say, Bill, a comment from you, but broadly pretty low.

Bill Metzger

Yes. So we spent quite a bit of time looking at that, especially at times like this, Joe. And things like inventory levels, mix of inventory that dealers own, the actions taken to defer interest payments and curtailment payments are obviously very helpful from a liquidity perspective. Most dealers, especially smaller dealers, have applied for government assistance which I think is helpful. Remember that service and getting boats on the water and having boating activity resume in some form or fashion is extremely helpful to most of these dealers. And the fact that we are starting to see some uptick in what I would call leading indicators is also very helpful.

Joe Altobello

Got it. Okay. And secondly, in terms of the OpEx issue, you mentioned the $525 million, $550 million. I think that's down probably $75 million, $80 million from what you originally had planned. How much of that $75 million to $80 million is structural do you think? And how much of that comes back next year, if hopefully we are in a better environment?

Dave Foulkes

Yes. I don't know if I would give you an exact number, Joe. I would say a portion of it is definitely structural. I think as a company and what you have seen from us is, we try to make things stick as much as we can. Obviously, there are some trends here that are very kind of localized around the production disruptions and stuff. But we are working to try and make sure that we continue the process of leaning out our cost base, although I wouldn't give you a number right now.

Operator

Thank you. Our next question comes from Scott Stember with C.L. King. You may proceed with your question.

Scott Stember

Thanks guys for taking my questions. Can you maybe talk about as you are ramping back up in April and May, I guess the capacity that you are ramping back up to at, least in the near term compared to where you were before COVID, just to try to get a sense of how things are ramping up?

Dave Foulkes

Yes. Sure. So on the engine side, we began to ramp up a couple of weeks ago and the first place we started was the production line that produces our newest platform, the 175 through 300 and the 450 racing engine. That was the area where we have consistently had the highest demand and where our inventory levels have got to the lowest point. We have now restarted the 400, 450 horsepower line and then we will progressively introduce other lines.

I think, obviously, we are managing this to make sure that all of our new protocols for health and safety work and we are progressively ramping up. But we feel that we are ramping up in a way that allows us to protect the upside here, even though we are being progressive.

On the boat side, I would say one of the things we didn't really talk about is, when we shut down operations fairly abruptly on March 23, we trapped a lot of retail sold boats on the production line. And we worked diligently during the interim period prior to the restart to rerack our production and make sure that we prioritize getting those retail sold boats off the line as soon as we restarted.

So I would say we are in a good position of being able to restart with quite a significant portion of Q2 already covered by retail sold boats. So that is allowing us to be progressive, but to ramp up relatively quickly.

So for example, at Boston Whaler, as far as I know right now, every production line is up. So that might not be the case everywhere, certainly the places that have restarted more recently. But I would say that we are balancing, making sure that everything is, - supply base is good, that the health and safety protocols work. But the good news is that we do have quite a lot of retail sold product that we can prioritize in the next several months.

Scott Stember

Okay. And with regards to the financial arm that you guys have, you talked about, I guess, offering curtailments to some of the dealers. Maybe just talk about the expected impact and maybe just frame this, what your loss experiences were back during the financial crisis and what you would expect this time around?

Bill Metzger

Yes. Scott, I will take that. Loss experience was actually pretty manageable on repurchases, but for one large dealer that we had an issue with. It was a high single, low double digit sort of number for a couple of years. And I would say that entering this crisis, we are much better positioned from an inventory perspective, a mix of inventory perspective and just general health of dealers.

I think dealers, as a lot, every cycle gain a little bit more experience. They get a little bit more conservative. And I think in total, industry-wide, we just get more disciplined. And I think that that is going to be very helpful depending upon how long we need to deal with some sort of a demand shortfall year-over-year and I think we are pretty well equipped for that.

The curtailment payments are really just putting in place something that allow a dealer to pay against a boat when it's sold as opposed to collecting principal before it's sold. And the objective here is to try to give dealers another couple of months of selling existing products and we are really talking about model year 2019 products. So it's a fairly small percentage of product that dealers have on their lots that's subjected to this.

That gives them a little bit of a liquidity relief at a time when they probably need it the most. And the same with interest, deferring the payment of interest until the boats associated with the interest cost actually gets sold and the cash gets generated so they can pay up the interest obligation and the boat obligation.

Operator

Thank you. Our next question comes from Craig Kennison with Baird. You may proceed with your question.

Craig Kennison

Good morning. Thanks for taking my questions as well and for taking a shot at framing 2020, despite all these uncertainties. It's nice to see the portfolio performing as it was designed as we face another downturn. And to that end, I am curious if you have any visibility into boat usage. I know in some markets, there are marinas that are closed. In others, boating might be one of the few recreational options available to people. So how do you net all of that together to think through what boating hours might accumulate this year?

Dave Foulkes

Hi Craig, it's Dave. I don't know if I could net it all out to boating hours. I would say where boating is allowed, usage is really strong. And we have seen that in a number of places. But it's been interesting with Freedom Boat Club. We have a bit more access to the consumer and people who want to go boating. I think our membership growth in the last week was I think close to double what it has been over the same period last year. So clearly, people are really desirous to get out on the water. We have had a lot of excitement around reopening of Freedom. And then people in Florida, particularly, I think boating has been strong, continues to be strong. So I would say as soon as the stay at home orders are lifted, there are some places are subjectively, we subjectively believe that people are going to want to get out.

Bill Metzger

There seems to be an awful lot of noise in places where people are precluded from boating, people wanting to get out on the water because they view it as being a safe activity and something that they want to be able to do.

Dave Foulkes

It was interesting, just a little anecdote. We were talking earlier, one of the staff members was saying and I think this is pretty common because we have heard that with school and college sports essentially not happening through probably spring and summer and with the prospect of not taking international vacations, then people, I think a number of people have decided to buy the boat that allows them to recreate and maintain distancing, which is favorable for us, obviously, as an industry.

Dave Foulkes

Great. Thank you.

Operator

Thank you. Our next question comes from Tim Conder with Wells Fargo. You may proceed with your question.

Tim Conder

Dave, thank you for that last comment. We are hearing some of the same things too. If you are not taking the destination vacation, maybe you save on commuting or eating out or whatever people are looking to do, some power sports related things, including boating. So no, thank you for confirming that. Back to the original question asked by James on framing the market. Roughly 60% of the units of the market roughly is aluminum-related boats. So I guess my real question there is in your down high teens, low-20s outlook, is there any color within that, better or worse, if you look at aluminum versus saltwater fishing versus other fiberglass? Any color you could give there? And then you talked a little bit already about the outboard engine expectations. Where are you seeing those large horsepower gains? Is it domestic? Is it international? Balanced? And is this a time right now where you can kind of put the pedal down and really accelerate that through this downturn? Do you feel in good position to do that?

Dave Foulkes

Yes. So maybe I will take the last part of the question first on high horsepower. Yes, we are seeing market share gains domestically and internationally. And through the first quarter, I would say, I would characterize them as substantial. Yes, the team at Mercury is absolutely not taking their foot off the pedal and we do see opportunity here. So yes, it remains absolutely a priority. They do have, as you know, the capacity to service all their channels now. And it was no coincidence that's the first line that we had to bring back, our first two lines that we had to bring back up were our high horsepower product lines, where inventory had already dropped to relatively low levels.

So yes, domestic and international. We have seen particular strength internationally in Asia, a lot of commercial applications, but domestically as well. I don't know if when we were calculating, back to your first part of your question, when we are estimating the market, I don't know if we get tremendous fidelity around aluminum or fiberglass.

Bill Metzger

I mean, I think we feel pretty good about our fiberglass categories, especially Boston Whaler, with the new product launches and favorable comparisons over the remainder of the year. I think that's a place where we are going to see some nice growth.

Dave Foulkes

We saw a spike in interest in sea rates.

Bill Metzger

Yes. And sea rates. And I would characterize, if you think about the way we have talked about outboard share gains, saltwater, repower and commercial, all thee of those are driving share gains. So it is unfolding the way we thought it would.

Operator

Thank you. Our next question comes from Gerrick Johnson with BMO Capital Markets. You may proceed with your question.

Gerrick Johnson

Great. Thank you. Good morning. Sticking with Mercury here. I was wondering what your order book looks like from the OEMs you supply to? And then you sold more dollars worth of outboards this quarter than boats. So can we talk about maybe the inventory pipeline out there for engines?

Bill Metzger

I will start with the pipeline. We monitor pipelines just as much as we monitor everything else. And we are not materially disconnected between the two, Gerrick. I think we are in pretty good shape in both and very comfortable with both. I think a lot of it has to do with maybe to our view of trailing versus forward, the fact that we have had more growth in outboard sales portends to kind of what the forward opportunity is at retail.

If there is any sort of pipeline growth is there, it's more about what our opportunity is moving forward at retail versus kind of what I would refer to be a disconnect. And the order books, we are obviously, everybody in the industry is ramping up at the same pace that we are. And order books are building just like we would expect them to, consistent with the way we see production and everything unfolding here in the second quarter.

Gerrick Johnson

Okay. Great. Thanks. And one last one from me. If you took the end of March and then April together, where are you seeing geographic performance? Are you seeing certain geographies do better than others and primarily U.S.?

Dave Foulkes

OUS.

Bill Metzger

I am not sure we have gotten that granular. When I looked at March, it looked to be pretty consistent across the board, at least the states that had reported, Gerrick. It has to be influenced by where there's been restrictions in place and where dealers have been allowed to operate. I think when we get a hold of April retail and full March, those things are going to correlate pretty well. I will say that boating activity tends to be centered around places where there aren't major concentrations of population. So I think as I think about people's willingness and ability to boat, I think that's going to be interesting to see how that plays out in some of the SSI data over the next two or three months to see just how much those areas have outperformed areas where restrictions have been the greatest.

Dave Foulkes

Yes. I would also say that a lot of the big boating areas are likely to relax restrictions somewhat faster, I think. Although we were really pleased that the New York, New Jersey area opened marinas several weeks ago. So in areas where boating is a significant part of the economy, I think we are seeing good progress.

Operator

Thank you. Our next question comes from Mike Swartz with SunTrust. You may proceed with your question.

Mike Swartz

Yes. Hi. Good morning guys. Bill, maybe to start off with just the commentary around operating deleverage and your outlook there, I think you said mid-20s, mid-30s. And historically, I think you have said over time that should trend more in the low-20s to mid-20s. So maybe what's the disconnect there? And maybe frame what the maybe lower end of the range means versus the higher end of the range? Is it all product mix? Or how should we think about that?

Bill Metzger

Yes. So if you think about it, the $25 million to $35 million is essentially kind of the range of what the volume impacts are going to be. If you mix together how boat's P&A and propulsion will all deleverage, it kind of gets you in that 25% to 35% range. The level of cost reductions of $50 million to $75 million is kind of what we are able to do and flex in response to the volume reduction.

It's really the other operating factors. And I would say the biggest one there is just absorption. With production shutdowns and pulling down inventories a little bit, we are producing, especially in propulsion, kind of below where the sales rate is for some period of time. And that carries with it a little bit of extra under absorption on fixed cost and that's probably the headwind that we would normally kind of be trading off volume against op expense. The headwinds that we are facing in that operating factor column are a little bit greater than what we normally anticipate. And not necessarily things, Michael, that I would consider to be all kind of run rate factors either.

So I am pretty comfortable with where we are delivering. I think we are balancing out all three about the same. And the volume reduction is a fairly significant volume reduction. And with a portfolio that's delevering at 25% to 35%, you really have to do a lot on the cost side to offset that. And quite frankly, I think, we are in a period where we ought to still continue to play a little offense instead of just playing defense.

And the fact that we are maintaining R&D at $120 million, $130 million worth of spend and maintaining all of our critical products is a decision we can make because our financial position allows us to and it maintains all the optionality on growth that we expected in our last three-year plan. So I think all of that stuff is very important and it's just trade-offs.

Operator

Thank you. At this time, I would like to turn the call back to Dave for some concluding remarks.

Dave Foulkes

Well, thank you very much all of you for attending the earnings call. I think as you can see, in the face of the challenges presented by COVID-19, our company is responding decisively with additional actions, but you can particularly see the benefits of the changes we made to our business model and our portfolio and our cost structure and our capital strategy and our product investments over the last few years. We are certainly encouraged by the trajectory of the leading indicators in the boat market, but we are maintaining a lot of flexibility as we go forward. So we have the same great strategy. We have the same great team. We are continuing to invest in new products and technologies and digital initiatives, which will carry us into the future and we will be even more formidable coming out of this than we were going in. Thank you all very much.

Bill Metzger

Thanks everybody.

Ryan Gwillim

Thanks everyone.

Bill Metzger

Stay safe.

Operator

Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.