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Investing.com -- Fitch Ratings has revised the outlook for Brunswick Corporation (NYSE:BC) from stable to negative, while affirming the company’s Long-Term Issuer Default Rating (IDR) and senior unsecured ratings at ’BBB’. The outlook revision reflects the growing challenges Brunswick faces in the current macro environment, including enhancing operational flexibility, managing costs, rebalancing inventory, and allocating capital.
Fitch’s calculations show Brunswick’s EBITDA gross leverage rose to 2.9x at the end of 2024, and it is expected to rise further in 2025 before declining toward the negative sensitivity of 2.0x over the next 24 months. The ratings agency could downgrade Brunswick’s ratings if the company experiences prolonged significant underperformance or diverts capital away from reducing leverage.
The rating affirmation is based on Brunswick’s improved business mix and profitability, which is supported by higher contributions from aftermarket business related to boating activities, a leading position in propulsion, and strong financial flexibility. Brunswick’s Free Cash Flow (FCF) margin above 5% and (CFO-capex)/debt ratio around 20% are strong for the rating category and help mitigate risk throughout the business cycle.
Despite a steep decline in volumes in 2024 due to a rebalancing of wholesale inventory levels at the dealer network, Brunswick’s management’s strategic focus on improving operational efficiency and optimizing dealer inventory levels offers the potential for gradual profitability improvement. U.S. Dealer inventory level at the end of 2024 was 12,700 units, down from 15,800 units at the end of 2019.
Fitch expects limited retail demand growth in 2025 due to weaker consumer confidence and higher interest rates. Combined with limited sales volume and ongoing promotions, this could result in lower near-term margins. Additionally, new risks from tariff threats could increase operational complexity and further weaken margins. Brunswick’s management anticipates up to a $100 million impact on profitability due to tariffs announced so far.
In response to demand headwinds, Brunswick’s management aims to reduce debt and cut share repurchases and capital expenditures to approximately $80 million and $160 million, respectively. The company has decided to prepay its $125 million senior notes, which were originally due in 2049.
Brunswick’s commitment to enhancing its recurring revenue, such as the Engine Parts & Accessories (EP&A), Navico and Freedom Boat Club, has improved business resilience. The company is now better positioned to weather a downturn than in previous cycles.
Brunswick’s product range is concentrated in the boating end-market, with a small exposure to the RV industry. The company is diversified within the boating industry, covering the entire spectrum of parts, components, and systems throughout a boat’s useful life, including maintenance, repair, and overhaul demand.
Fitch expects management to continue balancing capital allocation priorities between shareholder returns, organic investment, strategic M&A, and maintaining a strong balance sheet. Brunswick targets a net leverage of 1.5x. In 2025, management is aiming for $80 million of share repurchases and the capital expenditure requirement is lower following the completion of the new facility construction in Brownsburg, Indiana.
Fitch’s key assumptions within their rating case for Brunswick include low single-digit revenue growths in 2025-2028, EBITDA margins steadily recovering to high teens in 2027-2028, annual capex of around 3.0% - 4.0% of sales, and balanced capital allocation between debt reduction, shareholder returns, bolt-on acquisitions, and product R&D.
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