Brunswick Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
October 26, 2023

There are 12 speakers on the call.

Operator

Good morning. Welcome to Brunswick Corporation's Third Quarter 2023 Earnings Conference Call. Today's meeting will be recorded. If you have any objections, you may disconnect at this time. I would like to introduce Nehal Clark, Senior Vice President, Enterprise Finance, Brunswick Corporation.

Speaker 1

Good morning, and thank you for joining us. With me on the call this morning are Dave Foulkes, Grundswig's CEO and Ryan Guillam, 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 details on these factors to consider, Please refer to our recent SEC filings and today's press release.

Speaker 1

All of these documents are available on our website at brundswick.com. During our presentation, we will be referring to certain non GAAP financial information. Reconciliations of GAAP Non GAAP financial measures are provided in the appendix to this presentation and the reconciliation sections of the unaudited to the financial statements accompanying today's results. I will now turn the call over to Dave.

Speaker 2

Thanks, Neha, and good morning, everyone. Our businesses delivered a solid Q3 as continued market share gains, Strength in new products, efficient operations at our facilities, comprehensive cost control measures and the resilient composition of our portfolio We delivered $1,600,000,000 in net sales and slightly stronger than expected adjusted earnings per share of $2.42 in the quarter, in the upper half of our guidance range. We also generated strong free cash flow of $143,000,000 in the 3rd quarter, resulting in free cash flow conversion of 84% and delivering year to date free cash flow $233,000,000 higher than prior year. In addition, we continue to be aggressive with share repurchases executing $220,000,000 of listen. Mercury Marine has continued to capture solid market share gains this year with U.

Speaker 2

S. Outboard retail market share up 90 basis points year to date versus prior year. The new bulk market is on pace to finish generally in line with our estimates of down high single digits and Brunswick Brands continue to outperform the market. As we move out of the course season, We continue to actively manage our global boat field inventory levels and we closed the Q3 with 32.8 weeks on hand. We're working closely with our marine dealers and channel partners to maintain balanced inventory levels exiting 2023, targeting being generally in line with historical norms, which allows each location to carry a good representation of our model portfolio, while avoiding overstocking.

Speaker 2

In addition, we're providing strong but targeted promotional support for retail, in a listen. Investing in new products and technology, progressing our operational excellence goals and implementing structural cost reduction actions across the enterprise. I'll now turn to some of the segment highlights for the quarter. Our Propulsion business delivered top line growth with slightly lower earnings versus a record Q3 2022, driven by growth in outboard engines, especially in high cost power categories and controls and rigging, offset by relatively weaker sterndrive sales. Mercury gained 130 basis points of market share in high horsepower output engines over 150 horsepower versus 2022 as additional production capacity came online.

Speaker 2

During the quarter, the business also successfully ratified a new 5 year collective bargaining agreement with the union representing workers to its engine production facility in Fond du Lac, Wisconsin. And in addition, continued strong production of Avator Electric Outboards with 4,000 units manufactured to date. As we move into the off season, Mercury is seeing some slowing of OEM orders as the OEMs scale back production to control field inventory going into 2024. We expect OEMs to remain cautious as they assess customer sentiment at late 2023 early 2024 boat shows. While this is a short term headwind, it is allowing Mercury to gain share in the repower market, especially in high horsepower engines.

Speaker 2

Our Engine Parts and Accessories business demonstrated steady performance in the quarter, reflecting an improving sequential trend. Sales for the products portion of the business were up 4% versus prior year as consumers used their boats in the primary season. Distribution business sales were down year over year, which showed relative improvement from earlier in the year as dealer and retailer inventory destocking patterns moderated. Overall, segment sales were up 24% versus the Q3 of 2019. As anticipated, Navico Group posted higher gross and operating margins versus Q3 2022 despite lower sales as slower marine and RV OEM orders offset improving trends in aftermarket channels.

Speaker 2

Retailer stocking is recovering as we move into the Q4 with well received new product offerings driving strong retail pull through as we enter the holiday season. Additionally, acceleration of planned restructuring efforts continues to result in reduced Operating expenses versus prior year. Finally, our boat business performed to plan, continuing to introduce new models and white space brands in a listen and getting share while adjusting production to manage pipelines. The recently launched Navane Premium Adventure brand is nearly sold out for for model year 2024 and the refreshed Bayliner brand has also been well received. Freedom Boat Club continues to grow memberships listen now has 400 locations and nearly 60,000 membership agreements covering more than 91,000 members network wide, call while generating exceptionally strong synergy sales across our marine portfolio.

Speaker 2

Shifting to external factors, Stabilizing factors include strong employment, moderating inflation and a reduced pace of interest rate increases. However, despite the promotional environment and stable book purchase consideration, higher prices, high interest rates and credit availability Despite the fairly strong main selling season in 2023, buoyed to some extent by promotions, going into the off season, dealers are healthy, but anxious to avoid holding excess inventory ahead of an uncertain 2024. And we'll also be closely monitoring to customer behavior at upcoming and early 2024 Boat Shows. With field pipelines replenished, listen Both OEMs are reducing production rates by taking out weeks of production or shifts in Q4 to align with anticipated retail in 2024, for smaller value boats and lower horsepower engines with larger premium products not immune, but continuing to display relative strength. Given these factors, we are maintaining production discipline, which may add pressure in the short term, but will set up for a more predictable first half of twenty twenty four.

Speaker 2

Shifting now to a global view of revenue in the quarter. Overall, we saw a 7% sales decline on a constant currency basis. Year to date, the U. S. Market is showing relative strength versus international markets with sales relatively flat to 2022.

Speaker 2

U. S. New boat industry retail was flat in the quarter versus 2022 With year to date retail generally in line with expectations of down 7.5% versus 2022 And Brunswick growing share in both periods. Overall, year to date, Brunswick has performed better than the industry, picking up share, particularly through strong performance by our pontoon, premium fiberglass and tow brands supported by planned promotions and marketing on select product lines. Outboard engine industry retail units were up 3% in the 3rd quarter versus prior year, bringing year to date unit retail to down 2%.

Speaker 2

Mercury continues to outperform the industry with 3rd quarter share gains of 160 basis points in greater than 30 horsepower categories. We are actively managing both pipelines to achieve year end levels within historical norms and are exiting quarter 3 with global weeks on hand at a healthy level of 32.8 weeks. We anticipate ending the year with U. S. Pipeline levels in line with expectations at approximately 36 weeks and approximately 14,000 units versus approximately 35 weeks and 16,000 units on hand at the end of 2019.

Speaker 2

As is normally the case, international boat pipelines will be higher. Let me shift now to discuss some exciting new growth opportunities across our businesses. We are thrilled to add FLYHT to our portfolio of brands and product categories. E foiling is an emerging and disruptive activity that allows for an extended hours long surfing experience on inshore or coastal waters without the need for a wake boat or sail assistance and Flyte is the premium brand in the space with high market share. The flight team has already extended its product line to an easy to ride scooter and has many further developments in the pipeline.

Speaker 2

Through Mercury Marine in Brunswick, FLYK will have access to manufacturing and product technology and the world's largest marine distribution network. As I mentioned earlier, we recently launched our new premium adventure brand and product line, Novan at the Cannes International Boat Show. And the new models have been nominated for Best of Boat and European Powerboats of the Year 2024 Awards. You may also have seen that just a few days ago, we announced Brunswick Finance, an online retail finance solution that can be integrated into Brunswick and Thilo partner websites to provide rapid customer finance approvals in addition to supporting promotional financing. We're beginning to roll out this solution in Q4.

Speaker 2

And finally, Freedom Boat Club continues to expand rapidly in the Australian market, recently announcing its 7th location. We see the ANZP region as a substantial new opportunity for Freedom Growth. I'll now turn the call over to Ryan to provide some additional comments on our financial performance and outlook.

Speaker 3

Thanks, Dave, and good morning, everyone. As previewed at Investor Day last month, Brunswick delivered a solid Q3 despite softening market conditions throughout our businesses. When compared to the record prior year, 3rd quarter net sales were down 6% and adjusted EPS of $2.42 decreased 9%. Net sales in each segment benefited from annualized price increases, market share gains and benefits from well received new products, offset by lower wholesale orders resulting from field inventory reaching normal levels and softer retail market conditions. Operating earnings and margins were down versus prior year as the impact of the lower sales, listen.

Speaker 3

Slightly higher input costs, higher absorption and the unfavorable impact of foreign currency exchange rates more than offset benefits from aggressive cost control measures throughout the enterprise. Lastly, we had a strong free cash flow generation in quarter of $143,000,000 primarily due to stronger working capital generation, resulting in a free cash flow conversion of 84%. Year to date results also remain solid despite the uncertain macroeconomic environment. Sales are down slightly from the record 2022 with stable adjusted operating margins and EPS resulting listen from prudent operating expense control across the company, steady gross margin performance and in the case of adjusted EPS, to continued aggressive share repurchase activity. Our strong free cash flow performance is significantly outpacing prior year, reflecting our continued focus on driving cash in this challenging market.

Speaker 3

Now we'll look at each reporting segment, starting with our propulsion business. Revenue was slightly up versus the Q3 of 2022 as benefits from a favorable product mix Related to continued strong high horsepower outboard engine demand and higher sales to repower customers, Together with annual pricing were partially offset by order declines in the low and mid range horsepower outboard engines and sterndrive products. Operating earnings decreased versus prior year due to lower sales, higher input costs, including expenses related to the successful ratification of the Mercury Fondelec labor agreement and the unfavorable impact of foreign currency exchange rates, which more than offset the benefit from cost control measures. As Dave mentioned earlier, as we exit 2023 and enter 2024, we anticipate that we will continue to maintain our progressive market share gains, of primary retail selling season in 2024. This will enable us to sell more engines into the dealer channel, but the overall impact will still be a decrease in market demand for engines.

Speaker 3

The Engine Parts and Accessories business continues to improve sequentially throughout the year, with Q3 sales down 4% versus 2022, but up 24% over the Q3 of 2019. The high margin products business grew sales by 4% versus the prior year and by more than 10% in the United States. Distribution sales were down 10%, but trends continue to improve from earlier in 2023. Segment operating earnings were down versus prior year due to the slight sales decline and transition costs related to the newly opened distribution center. Note that October orders in both the products and distribution businesses continue to trend positive as boat usage remains strong and customers in Northern climates begin to winterize their products.

Speaker 3

As anticipated, Navico Group had an improved 3rd quarter Segment sales were down 9% due to these sales dynamics, but adjusted operating margins were up 110 basis points and adjusted operating earnings were up 3% as benefits from accelerated cost reduction actions and reorganization efforts together with strong new product performance more than offset the impact of lower sales. The 4th to the retailer's wholesale reordering patterns at a time where inventory levels are normalized. Finally, our Boat business performed to plan, continuing to introduce new models in white space brands and gaining share, while adjusting production to manage pipelines. Sales are down 16% versus Q3 of 2022, given the production reductions, Together with continued elevated discounting to drive end of season retail. Adjusted operating margins and earnings were down primarily to the lower sales, partially offset by focused cost reduction activities.

Speaker 3

Freedom Boat Club, which is included in business session had another solid quarter contributing approximately 9% of the boat segment's revenue during the quarter, while seeing very steady membership levels despite the macroeconomic uncertainty. Although we're entering the off season in most of our primary selling regions, we are focused on demonstrating resilient EPS and cash flow in a challenging market, while constraining our pipelines to appropriate historical norms and delivering against our strategic initiatives. The ongoing uncertain market conditions are resulting in measured ordering patterns by our retail channel partners and reduced production schedules with our marine and RV customers, but we continue to target marketing and promotional activities on select products to support retail sales, while remaining steadfast in balancing inventory and pipeline levels. As a result and as previewed at Investor Day, we anticipate revenue of $6,450,000,000 to $6,500,000,000 Adjusted operating margins of approximately 14% and adjusted EPS of approximately $9 We continue to see positive free cash flow conversion and working capital trends and still anticipate generating more than $375,000,000 of free cash flow for the year. Lastly, we also have 2 full year P and L assumptions that we have updated.

Speaker 3

1st, Given our continued strong cash flow performance and recent further Brunswick share price dislocation, we are increasing our repurchase target to listen to $275,000,000 of repurchases for the full year. As a result, we anticipate slightly lower average diluted shares outstanding of approximately $70,250,000 2nd, with the strengthening U. S. Dollar, we now anticipate a slightly larger full year foreign exchange Headwind of approximately $35,000,000 I will now pass the call back over to Dave for concluding remarks.

Speaker 2

Thanks, Ryan. Before we close, I wanted to share some examples of recent recognition Brunswick has received for our people, business, culture and products. We're on pace for over 100 major awards this year, an all time record. For the 4th consecutive year, Brunswick was named to Forbes' list of the world's best employers, ranking in the top 30% of the 700 companies that made the final list. This award is a testament to our enduring commitment to being an employer of choice and creating a world class environment for our global employees.

Speaker 2

Brunswick has also been named in Newsweek's inaugural list of the World's Most Trustworthy Companies, reflecting our commitment to integrity, listen to safety and quality in our business and was named one of America's Greenest Companies, reflecting our numerous sustainability initiatives and commitment to further improvement. Finally, our products continue to be recognized for excellence on the global stage. I already mentioned our success with Nevada, but Boat Group's new Sea Ray SPX-two ten also won the Motor Boat Magazine Award to the best boat below 7 meters at the Cannes Boat Show, further evidence of our commitment to leading the way in new products and technology across our businesses. Thank you again for joining the call. We'll now begin the Q and A.

Operator

Thank you. Our first question is from Megan Alexander with Morgan Stanley. Please proceed.

Speaker 4

Hi. Thanks for taking our questions. I guess maybe you did give some commentary on 2024. Could you maybe just update us on your base case expectation for a Flat Retail Boat Market next year.

Speaker 2

Hi, Megan. Yes, I think, yes, that's still our base case assumption. I think Obviously, as you've seen, we're trying to match and I think achieving a good match between wholesale and retail as we go into Next year, I think the base of the assumption really is obviously we're at for a start we're at overall of retail levels that are more like 2014. So we've been pulled down about 30% since the peak. I think the other thing that leads us to that conclusion really is that the prevailing consumer conditions For most of the selling season this year, we would expect to be pretty similar next year.

Speaker 2

Price all the price increases that have really already occurred. So pricing is now very similar to historical levels. Interest rates, we don't see rising too much more, If it's all on balance during next year. So also next year, we were Q1, we were not as heavy on promotions as we will later in the year, they seem to be pretty effective. So I think a combination of consumer conditions that are pretty similar to this year, Probably some increased promotional activity from us in the Q1 to kind of recognize where the market is Leads us to believe that that's a reasonable baseline assumption.

Speaker 2

Of course, it could be different for various reasons. I would say on top of that, The market obviously is not behaving in a homogeneous way. We still are seeing more resilience in the premium end of the market. And actually, interestingly, just feedback from the 1st day of the Fort Lauderdale Boat Show, sales are strong on the 1st day. That's obviously a premium So that was encouraging.

Speaker 2

So those are essentially some of the components that go into our assumptions.

Speaker 4

Okay. That's helpful. And maybe a follow-up if that's still the case. Can you maybe talk through some of the puts and takes just on the margin line and then maybe getting to the bottom line. You talked about maybe having some destocking in boats in propulsion, but you are lapping some significant headwinds in Navico and P and A, which also seem to be improving.

Speaker 4

I know you also talked about of interest expense headwinds, but you're driving strong free cash flow. So is the $9 that we're looking at for of the Q3. Is that the right floor to think about as a base case for next year?

Speaker 3

Hey, Megan, it's Ryan. I'll go ahead and take this one. Listen. And take it in reverse, I'm not sure we know enough today in October to say that $9 a share will be a floor, but it's certainly in the set of possibilities or set of outcomes for next year. So We'll just have to wait and see what the next handful of months bring us before we give more definitive 'twenty four guidance, but definitely $9 is in the competition set.

Speaker 3

The puts and takes, I think you had several of them. I think On the plus side, parts and accessories is really performing kind of as we thought it would historically. I think there was Some year over year comps that spooked people on Engine P and A and now that we're back to kind of normalized comps, You're seeing that business grow at a low to mid single digit percentage kind of quarter in quarter out, both sequentially and year over year. So As we get into next year, I think you're going to see goodness on the margins due to Engine P and A Business. I think you'll also see growth on margin on Navico.

Speaker 3

I I think we've been pretty clear that Navico is probably near its or coming off of its trough position On margins and all of the reorganization and good work that they've done, you're going to get a full year benefit of that as you move forward. I would say that the interest piece is obviously real. We're going to have to refinance our notes that are at 0.85%, sadly. But we'll be smart and try to minimize the impact there. But to combat that will also continue to be very aggressive on share repurchases.

Speaker 3

Given where we're trading today, I think that's something that Obviously, on the EPS line, it will help on the margins, but that will be a good benefit there. So across the line, I think we see retail matching Sales which have been pretty clear about some really strong movement in the P and A businesses in Navico and probably offset a little bit of difference in wholesale retail and boat and propulsion. And that's how you get a margin that's pretty sustainable even at 2014, 2015 retail levels.

Speaker 4

Really helpful. Thank you. I appreciate it.

Operator

Our next question is from James Hardiman with Citi. Please proceed.

Speaker 5

Good morning. Thanks for taking my call. Ryan, that was really good color. I want to, as you can imagine, dig even further on some of that. As I think about your boat business, where do we think the delta between wholesale and retail We'll finish this year.

Speaker 5

I mean, obviously, there was some replenishment earlier in the year. And I'm just trying to figure out what sort of a headwind that represents As we look to 2024, I get to about a 3,500 unit headwind, about 10%. Is that in the neighborhood too high, too low?

Speaker 2

Hi, James. Thanks for your I think Ryan and I will kind of tax team it. I think In the U. S, we produced maybe 2,000 or so units more at wholesale than we did at retail. So but I would say they probably almost entirely value units.

Speaker 2

So different mix in terms of dollars. So that obviously represents a headwind as we go into next year, but not a huge headwind. I would say particularly the cost takeouts that we've done across the enterprise, including in the Boat Group, We're progressive through this year, so there were higher impact in Q3 and Q4. So on a Kind of run rate basis going into 2024, we should have some cost benefits there, Randy.

Speaker 3

Yes. No, that's correct.

Speaker 5

That's helpful. So suffice it to say, I mean, again, we're going to learn a lot more 3 months from now presumably. It's going to be real hard for the Boat segment to grow the top line. I guess in previous conversations, and you talked a lot about P and A, Engine P and A and Navico. I guess what's your level of confidence that propulsion can grow next year.

Speaker 5

That's the one where it seemed like at least previously you had the highest degree of confidence that in a listen Through hell or high water that that segment would be up on both the top and bottom line. Where do you stand here today and what will allow you to sort of outgrow an unpredictable market next year.

Speaker 2

I think the market share gains Continued. So we know we clearly have a secular trend on top of some cyclicality here. I would tell you that At the Fort Lauderdale show, Mercury had 57%, I think share Overall, but close to 70% share of engines on the water, which is by far our best showing. And as you know, that is a nice in a proxy for new boats coming out and where Mercury share might be headed. So I think the secular trend supporting Mercury high horsepower Continue to be extremely strong.

Speaker 2

Of course, in the end, it depends exactly on how the market performs next year. But I would say, premium boats generally have higher horsepower engines, continue to be strong, not just domestically. We're also seeing the same thing in Europe, where our higher horsepower customers with more premium boats are also the strongest. Very difficult to see exactly how this is all going to net out. But generally, we remain very constructive listen.

Speaker 3

We have continued

Speaker 2

to gain share in repower as we buy capacity available, continue to convert OEMs, Both new OEMs, but also greater share on existing OEMs. So, I think in the end, it's going to depend on how all of these things net out, but I think we have a lot of Positives as well as some potential negatives.

Speaker 5

Okay. And so just to clarify, Seemed like previously you were real confident that propulsion would grow next year. Now it sort of sounds like a depends sort of I'll take it as we sit here, obviously, with a lot more data to come in. Is that accurate?

Speaker 2

I think I would say that I think that all of the things that Our constructive trends on a secular basis for propulsion are still in place. This is really a is the market going to be slightly Better than we assume or slightly worse than we assume. But I would say that we're very confident that The investment in high horsepower and our overall performance in high horsepower will yield share gains. I don't exactly know how that's so good and that's out next year, But Mercury will end up stronger by the end of next year than it is the end of this year, I think.

Speaker 3

And probably the other good news is we have Done our investment. We've done the investment on the capacity. We've done our investment on new products. There'll still be other things, but we're now at a time where we can harvest those investments And really use them to gain share here moving forward.

Speaker 5

Got it. Appreciate the color. Thanks, guys.

Operator

Our next question is from Zane Hsu with BNP Paribas. Please proceed.

Speaker 6

Hi, guys. Thanks for the question. Call. On inventories, you mentioned weeks on hand, you expect to exit the year at about 36 weeks, which is pretty much in line with 29 to 35. But I guess given higher floor plan financing, higher ASPs and maybe kind of an uncertain Retail market, do you think like that we saw in hand should be actually lower than 2019 or

Speaker 2

How do you think about that? Yes, I think we've had this kind of back and forwards for a while. What we have Always been saying that in the 30s is probably where mix on hand needs to be, Especially at a lower market level, so dealers have a representative selection of our portfolio. On a unit basis, it is lower than 2019, 14,000 units versus 16,000 units. And that is a reflection obviously with the overall Retail level, but could be to some extent the floor plan financing availability and credit limits and that kind of stuff.

Speaker 2

I don't See that as a significant issue for us at the moment. I think overall the predominant desire and alignment between us and our channel partners is to just get the inventory level right. And I don't think that there is a specific issue with credit limits or kind of dollar value of inventory that's really prevailing at the moment. I think as you if you think about it, If retail is flat, obviously, that is 36 weeks on a trailing basis and a forward looking basis, which Seems to us to be extremely appropriate and the ability to kind of land the plane after a year like this with $9 of EPS and inventory in line. It's not a bad trick, to be honest.

Speaker 2

So I think that I think we feel very comfortable about it.

Speaker 6

Okay, great. That makes sense. And then maybe on propulsion guidance, a bit lower on revenues, Margins were maintained. Maybe can you walk through some of the bridge to hold the margin?

Speaker 3

Yes, I can take that one. The propulsion business is larger than it as it has several levers to be able to pull Certainly in terms of OpEx, but it starts at the gross margin line, frankly, and they continue to hold gross margin steady, if not A little bit, even despite volume. And Jan, that's mainly because of the strength in the high horsepower. So There's also a bit of mix in there. Obviously, dealer orders were really strong in the quarter and that comes with it a little bit of Premium on the earnings front as well.

Speaker 3

We had a little headwind in currency in the quarter and we're hoping that that abates a bit as we kind of run out the year. But really that's that those are the biggest pieces.

Speaker 2

Yes. I just noted we obviously had the one off issue with the security incident this year, which obviously was an absorption issue for a period.

Speaker 7

That's right.

Speaker 6

Okay, great. Thank you, guys. Good luck.

Operator

Our next question is from Craig Kennison with Baird. Please proceed.

Speaker 7

Hey, good morning. Thanks for taking my question. I wanted to revisit, I guess, your base case for retail next year. I know it's early, But certainly, in my mind, retail being flat next year would be fantastic and well above what I think the market may expect. I would note that Patrick, which is a supplier to this industry, just said on its call, they have an expectation for a 15% decline Next year and I know they cater to a lower end, but still a pretty wide gap there.

Speaker 7

So I guess my question is, like what is the recession playbook at Brunswick and how quickly can you pivot to that to kind of protect the floor and earnings power, whatever you think that might be?

Speaker 2

Yes. Craig, I went through the assumptions really that drive us to of kind of a flattish retail assumption next year. I think I stand by those at the moment. The call we gave earlier this year about modestly down. Obviously, the market appeared to vary quite a lot, but it kind of came back to where we thought it was.

Speaker 2

That That doesn't mean that we're always right, but I think we have a decent feel for this. But I think what you've seen this year is We have all kinds of levers to pull and we're very effective at doing it. We began to work on operating expense very quickly this year So as we and that was obviously progressive during the year, so on a run rate basis was higher as we go into 2024. But we still have some things that are pretty favorable for us. Obviously, as we see the market softer and generally market softer across recreation and beyond the Customer supply dynamics change.

Speaker 2

We're able to influence pricing somewhat more. We pivot people from Whatever they were doing this year to work more on getting COGS reductions, Design cost reductions, negotiate cost reductions, all those kind of things, including working on our operating expense lines as well. So I think we still have plenty of levers to pull and we listen.

Speaker 3

And I would just Craig, I think you know this, but I'd caution 15% down from this year would be below The level of sales after the GFC. So obviously, everyone's doing their best to forecast the market, but that would seem to be an extremely down scenario given what we've seen in the environment even this year.

Speaker 2

Craig, I wouldn't also neglect what we can do on the go to market side. The New Brunswick Finance solution that we're just rolling out, I think is gives us some unique flexibility to offer customers promotional financing of various kinds, kind of bridge them through this period of higher rates. So this is a multitude of levers that we have to pull on the go to market side,

Speaker 3

Actually throw in the capital strategy side. I mean, if we needed to, Craig, we could take CapEx down to maintenance levels, which is 30%, 35%, Which that starts at $100,000,000 to $125,000,000 I'm not saying we would want to, but that's something we could do. To our cash generation and our ability to convert working capital has been proven to be pretty strong this year and I would anticipate Next year. So in your scenario, we would go into even more cash generation, buckledown mode And we've proven our ability to do that just because we don't have a whole lot of other fixed obligations to service at this time with our Cost capital and cost of debt being relatively low.

Speaker 2

Yes. Without belaboring this, Craig, it was great, but it was an interesting question, I think. Listen. We will finish this year if we hit our $9 EPS. We'll be 10% on EPS below last year, but we've been about 10% up on 2021.

Speaker 2

This will be our 2nd best year ever in market conditions that are less than ideal. So I think we will continue to perform.

Speaker 7

That's really helpful. Thanks guys.

Operator

Our next question is from Jamie Katz with Morningstar. Please proceed.

Speaker 8

Hi, good morning. Could you guys talk a little bit about the impetus for the new retail financing partnership? I know you just mentioned that it was to Help consumers through this period of time, but I'm wondering if it also implies that maybe other retail Financing partners are getting a little bit more cautious and are maybe changing their tune in lending currently.

Speaker 2

Hi, Jim. No, it doesn't imply that at all. I think we have been in the retail financing. We have a business called Blue Water Finance. So we've been in the retail financing kind of arena for a while.

Speaker 2

This is really an integrated digital finance solution that is just much easier and quicker for consumers to access. So it's embedded in a website. You configure a boat, you can immediately get not only the boat cost, but also approval for at least provisional approval for financing that would move through to the dealer. So and it allows us to have more flexibility with promotional finance offerings. Obviously, at the moment, In the current environment, we're offering discounts on purchase price and other things, option allowances, those kinds of things.

Speaker 2

But this is a new lever for us to pull if we see that a consumer is Most cautious because of interest rates versus other potential criteria then this gives us another option. So yes, it's nothing to do with lender availability, everything to do with giving ourselves a better toolkit and giving our consumers a better listen through the process of acquiring the boat.

Speaker 8

Excellent. And then can you just speak to new voters in the market and your ability to continue to track them in this sort of environment. Has the Mix of purchasers or participants been changing at all in the last 6 months or so and sort of what are you expecting going forward?

Speaker 2

Actually, I'll be honest with you, I don't have an updated kind of data set on new boaters, but we I would tell you though that Brunswick brands over index towards attracting new voters. And interestingly, not only in our value brands Like Bayline, even in our premium brands. And I think the reason part of the reason for that at least is brand recognition. If you own 3 of the 4 best known brands in the U. S.

Speaker 2

And you're a new boater, it's kind of we're an obvious choice We're at the top of every list of potential boats in whatever category you want to buy a boat. So I think brand strength, new products Always going to mean that new boaters, less valuable in the marketplace and gravitate to our brands.

Speaker 3

And in addition, Freedom. Freedom is such a good gateway for new voters, new and returning voters, voters that have maybe been out for a decade or more, Jamie. And so that we continue to see really steady membership at Freedom despite What is obviously a bit of a turbulent time in the market in the overall economy. So all of those things really lend itself to continuing to find ways to bring new voters in.

Speaker 8

Great. Thanks for the color.

Operator

Our next question is from Joe Altobello with Raymond James. Please proceed.

Speaker 9

Thanks. Hey, guys. Good morning. I guess first question for you, Ryan. Obviously, you were hesitant to call $9 in EPS lower for next year, Understandably given all the uncertainty, but you said in the past that you felt like $8 is a reasonable recession Is that still what you're thinking?

Speaker 3

Hi, Joe. Yes. We still Stand very much behind those $6 $8 cases. I think those give a really nice background into what How we perform in a market situation that obviously we're kind of seeing ourselves in. The market is almost down 30%, 35%.

Speaker 3

So, yes, I don't think there'll be a whole lot of changes to our thinking on the $8 case. I would say, again, Engine P and A, some good lights there and impact to kind of steady growth. Navico continuing to be improved, A strong capital strategy and then kind of steady boat and propulsion as they work through market dynamics. All of those things We're embedded into those plans and I think we would be very comfortable with those still.

Speaker 9

Okay, helpful. And maybe in terms of dealers and how they're thinking about ordering and demand for next year, when do you think they'll get enough information To start impacting orders, is it Miami? Is it Palm Beach?

Speaker 2

It's a range Joe, it depends what Brands and dealers you're talking about, obviously Fort Lauderdale is going on right now for the next few days, which is premium brand, Premium kind of saltwater fiberglass focused, but towards the end of the year, early year shows like Toronto, Chicago, Minneapolis, all in January would be important for the aluminum market, Dusseldorf, also at the end of January for the European market, which is mainly a fiberglass market, not so much a limited market. And then in mid February, of course, we have Miami, which is the next big show. So it's really Progressive, I mean, this year we're going through Genoa, Paris, Can, all those kind of things. It's a pretty steady stream of late season shows and early season listen.

Speaker 9

Okay. So it should be pretty early in calendar 'twenty four, let me know.

Speaker 2

Yes, depending on the brand. I mean, I think Fort Lauderdale will be a good pointer for premium. So, 1st day was very encouraging for us. We'll see how the rest of the show unfolds. And then as you get into the balance of the year, obviously not much going on in December, but really early January, you get into quite a lot of aluminum shows.

Speaker 2

So that will be a good indication of what buyers are feeling at that point in time. And then late January to early February, we'll see More fiberless, particularly on the premium end.

Speaker 9

Got it. Thank you.

Operator

Our next question is from Scott Stember with ROTH MKM. Please proceed.

Speaker 5

Good morning. Thanks for taking my questions, guys.

Speaker 3

Hey, Scott.

Speaker 10

On the parts and accessories side, can you talk about what retail POS is looking at looking like And maybe parse that out RV versus both?

Speaker 3

Yes, I can take that. We still have limited POS information from various retails. I'd say on the marine side, Kind of on the traditional marine side, Scott. We're seeing kind of retail and wholesale matching. We're seeing dealers take The inventory they need at the end of the year to winterize product and obviously the Southern Hemisphere to keep folks on the water.

Speaker 3

So again, U. S. Products Was up 10% in the quarter, and only a bit of that is price. So a lot of that is really nice strong demand and filling channels in ahead of a kind of the end of the season, in those places where there is an end of the season. For, kind of more retailers and that is primarily We see that in the Navco Group.

Speaker 3

We believe that their inventories are right sized as we enter the holiday. So we're seeing pretty strong Point of sale there, certainly on the new products that Navitasos come out with. I mean to really drive retail ahead of the holiday, New products is key and we continue to see good performance there. Obviously, we said it in the release, but The holiday season is a big time for Navico. They're preparing and getting the right inventory in the dealer and retailer hands and we would anticipate a pretty strong performance.

Speaker 10

All right. Just last question. One of your competitors in the recreation and leisure space, Far Ford vehicles did mention earlier this week that they're seeing or at least they're hearing from the lenders that there is a slight tightening going on with Lenders looking more heavily at things like debt to income ratios. Are you seeing that Tightening in your markets at all?

Speaker 2

We're talking about retail financing, right? Yes. Credit scores and yes. I think the spreads are higher. So I think getting to the kind of 9% report is pretty good So I think we probably are seeing a bit of increase in the spreads.

Speaker 2

I wouldn't say it's Particularly not still at the moment, we could get some more detail on that. But yes, I think that's probably true.

Speaker 3

And we are just continuing to see an influx of people bringing cash, up and down the whole spectrum, including premium. So that is one that we continue to see.

Speaker 5

Okay, got it. All right, that's all I have. Thank you.

Speaker 2

Thank you.

Operator

Our next question is from Mike Swartz with Trove Securities. Please proceed.

Speaker 11

Hey, guys. Good morning. Maybe just following up on Joe's question around order books for 2024, model year 2024. I know there's we're very early in the show season. But maybe is there any sense or any range

Speaker 2

you can give us of

Speaker 11

listen What those maybe early commitments have looked like versus at the same time last year?

Speaker 2

Listen Yes. Hi, Mike. That's strong. We have very solid order banks across all of our brands at this point in time and I would say very similar across most brands to last year or at least if not last year, at least in line with our expectations What's appropriate for this year? So we go through looking at percentage of fulfillment and you probably know we go on a trimester basis here.

Speaker 2

So Right now, we're looking at the kind of first trimester orders, but also the Pointer of full year. But I would say that I don't have the latest numbers, but I think we're aligned pretty well now and have very solid orders from all of our dealers.

Speaker 11

Okay. And then with the new labor agreement up in Fond du Lac, just a broader question for 2024. I mean, I guess, how should we think about the cost environment? Is it still going to be fairly inflationary? Are you seeing any the cost curve flatten out or maybe even seeing any benefits as we go into 2024?

Speaker 2

Yes, I would say that Overall, I think the environment is turning much more favorable for us In terms of supplier pricing, suppliers willing to take Willing to offer discounts, willing to offer lower prices to us. Commodities obviously have come more in line with historical norms. I think our labor cost increases will be very normal. So nothing Kind of out of the ordinary for next year. So I would say overall the cost environment is going to be constructive for us and we're I'm putting a lot of resources in that area right now.

Speaker 2

I would say making sure we're very actively working with the supply base to get the best cost, Evaluating alternative suppliers. So yes, we will work very actively in that area and I would expect overall for that to be constructed for the year. Yes.

Speaker 3

And every division has cost takeout programs and plans and targets for the year, Not just at the OpEx level, but ways to bring clogs down as well. So back to the earlier question on what streams do you pull in a Tough economic time, looking at programs at the gross margin line can be equally as important as just raw cost takeout at OpEx.

Operator

Our next question is from Matthew Boss with JPMorgan. Please proceed.

Speaker 11

Great. Thanks. Dave, so maybe higher level, could you just elaborate on the consumer and dealer sentiment today, Maybe relative to 3 months ago or just how or what evolved exactly in the forecast? And then specifically with the higher interest rate backdrop, Are there any changes you've seen so far in the promotional landscape or just what levers would you or could you pull to entice customers to convert if needed?

Speaker 2

I think I don't think it's really a change in sentiment really. I think it's just The part of the season that we're in right now, obviously, 3 months ago, we're in the height of the selling season. People are spending their time doing a whole bunch of other stuff, selling as much as they We can. Focusing on getting product out the door. Now they're pivoting to Much consideration of stocking levels to what is mainly the off season.

Speaker 2

So I don't think sentiment has really changed a lot. I think that just Now going through normal seasonal changes in the way that they're focusing. I think you can tell from to our field inventory levels that we have been very careful to make sure that we align well with our dealers, Everybody feels good about stocking levels going into 2024. So I would say they're encouraged By that, I think the so I don't think that there is a huge change in sentiment. Also feedback I'm getting, I'm going down call later this afternoon.

Speaker 2

I'll get some direct feedback. But broadly, OEM customers seem to be pretty positive. Obviously, that show is a premium show

Speaker 9

and that

Speaker 2

is the most resilient part of the marketplace. So I just I don't think There is a marked change. I think there's just general caution. Broadly, Some of the earlier questions were talking about some of the more downside scenarios for next year, but broadly things are generally stabilizing on a Price basis on an interest rate basis, the environment is somewhat more stable. I think that there is Caution some about what might happen next year, but I wouldn't say there's a notable change in sentiment either from OEMs or And consumer, sorry, what was the second part of that?

Speaker 2

That was in the part of the question.

Speaker 9

I'm

Speaker 2

sorry, could you repeat the second part of the question?

Speaker 11

Any changes in the promotional landscape or are there levers that you would pull just given the higher interest rate environment to entice a customer to convert?

Speaker 2

Yes, promotions through the kind of back end of the selling season were kind of up at of 2019 levels, I would say. To be honest, at the moment, from now through the end of the year, we'll be less than 10% of the total annual sales, much less than 10%. So the influence of promotions It's diminishing except in the Southern markets where and those are mostly fiberglass premium markets where we haven't had such a promotional environment. So we might be kind of working to get the last few units that we can, but I would say the promotion at this time of the year is just not super effective and not super meaningful in the Northern markets.

Speaker 11

Helpful color. Best of luck.

Operator

Our next question is from Tristan Thomas Martin with BMO Capital Markets. Please proceed.

Speaker 9

Hi, good morning.

Speaker 3

Two quick ones. 1, you mentioned Fort Lauderdale a couple of times. How were some of the other fall And then with Free Mill Club, what's the state of the fleet there? And then what could a potential kind of refresh upgrade cycle look like? Thanks.

Speaker 2

Yes, good question. So really, Fort Lauderdale, Miami is Kind of start of season premium show in the U. S. And Fort Lauderdale is more the end of season U. S.

Speaker 2

Show. We've been really focusing quite a lot on European shows recently. We had a really strong showing at CAT. Our brands were extremely well received. We were able to get some listen.

Speaker 2

Large Boston wheelers and large Sea Rays over to Europe for a change because in the past 3 years everything has been sold in the U. S. So it was very encouraging to get those bigger product spouts over to Europe and they sold very well. The van was really well received and I think represents a significant opportunity for us. And Mercury's market share through all of those shows was I can't remember the exact numbers, but we were in the high 50s to 60s of pretty much every show.

Speaker 2

So All of the constructive factors that we continue to see were prevailing through the latest season European shows. And then obviously, we just have one day of fallout of the deal behind us, but hoping for the best for the balance of that show.

Operator

I would like to turn the call back over to Dave for some concluding remarks.

Speaker 2

Okay. Thank you all for joining us very much and for the great As you saw, despite the challenges, we again delivered a very solid quarter. For the rest of the year, our focus is on balancing, continuing to deliver those solid earnings to free cash flow with the imperative of making sure that end of year inventory and pipelines are in the right place as we head into 2024. I I think the fact that we're able to do all this, still deliver our 2nd best ever year with EPS within 10% of 2022, 10% higher than 2021 is pretty remarkable, We're still moving forward all of our strategic priorities. We didn't really talk much about electrification like Avator and Flight, but those Continue to be positive growth opportunities for us.

Speaker 2

And just again, it is nice to see when There's a lot of uncertainty around. Mercury comes through again with 57% share at Lauderdale and close to 70% on the water. So that is an incredible trend that just continues forward and we're very encouraged by it. All right. Thank you all very much for joining us.

Operator

Thank you. This will conclude today's conference. You may disconnect your lines at this time and thank you for your participation.

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Earnings Conference Call
Brunswick Q3 2023
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