Brunswick Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
July 27, 2023

There are 11 speakers on the call.

Operator

Morning, and welcome to the Brunswick Corporation's 2nd Quarter 2023 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 Neha Clark, Senior Vice President, Enterprise Finance, Brunswick Corporation.

Operator

Please proceed.

Speaker 1

Good morning, and thank you for joining us. With me on the call this morning are Dave Fouts, Brunswick's CEO and Ryan Gwilliam, 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. All of these documents are available on our website atfrenzwex.com.

Speaker 1

During our presentation, We will 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 section of the unaudited consolidated 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 executed a strong second quarter, benefiting from market share gains, well received new products, solid operational performance and diligent cost control. We delivered $1,700,000,000 in net sales and adjusted earnings per share of $2.35 including the financial impact of the IT security incident, which I'll discuss more in a moment. Mercury Marine continues to gain market share with U. S.

Speaker 2

Outboard retail market share up 140 basis points year to date versus prior year. While the new boat market continues to face headwinds, there's been relative improvement in recent months With preliminary June U. S. SSI main powerboat retail turning positive and Brunswick outperforming the market in June year to date. As we move through the core season, Oakfield inventory remains at an appropriate level in most categories.

Speaker 2

And we closed the Q2 with around 19,000 units in our global pipeline. We are focused on ensuring the pipelines remain healthy to carry a good representation of our portfolio at their locations, while ensuring that we maintain inventory freshness. We generated strong free cash flow of $193,000,000 in the 2nd quarter, resulting in 2023 first half free cash flow coming in $144,000,000 higher than prior year. In addition, we continue to be aggressive with share repurchases, executing $132,000,000 of repurchases year to date. We are relentlessly executing our strategic priorities, including advancing our ACES initiatives, investing in new products, progressing our operational excellence goals and implementing structural cost reduction actions across the enterprise.

Speaker 2

On June 13, we announced that we've been impacted by an IT security incident, which ultimately resulted in 2nd quarter financial results that were lower than initial expectations. The disruption associated with the IT security incident was most significant in our Propulsion and Engine Parts and Accessories segments. And because of the proximity to the end of the quarter, there was limited opportunity to recover fully within the same period. Within 9 days, the company announced that all primary global manufacturing and distribution facilities were fully operational with no significant residual impacts. We have the opportunity to recover some lost production and distribution across our businesses, which will partially offset lost days in the second quarter.

Speaker 2

However, lost production days on high horsepower outboard engines will be challenging to recover because the production schedule was already full for the balance of the year. We estimate the financial impact to be approximately $80,000,000 to $85,000,000 of revenue in the quarter and $60,000,000 to $70,000,000 for the full year. I'll turn now to some of the segment highlights that facilitated a solid second quarter. Prior to the disruption from the IT security incident, Our high horsepower outboard engine production ramp up was progressing and has since resumed, allowing us to increase shipments to repower customers and OEM partners. Mercury Marine continues to expand outward propulsion retail market share around the globe, demonstrating the strength of our comprehensive During the quarter, we launched the Mercury Racing 500R Outboard, shipped the first model in our Avator electric outboard lineup to global customers and announced that we've begun serial production of the next two models.

Speaker 2

Our Engine Parts and Accessories businesses performed as expected, reflecting anticipated sales and earnings declines versus a record Q2 of 2022, although sales were up 12% versus the Q2 of 2019. 2nd quarter sales in the U. S. Products portion of the business were near flat to Q2 2022, reflecting strong sales growth exiting the quarter. We continue to progress the transition to the new Brownsburg, Indiana Distribution Center.

Speaker 2

However, sales in the distribution portion of the business were down versus 2022 as dealers and retailers continue to hold lower levels of inventory, although trends have improved into the season. As foreseen, Navico Group posted lower second quarter sales versus 2022 as stocking pressure by some retail channel partners continued, but with improving trends in many retailers in the latter part of the period. Our recently launched products, including the Lowrance HDS Pro Fishfinder and Simrad HALO radar are performing very well in the market. Additionally, restructuring actions were accelerated, generating lower operating expenses versus prior year. Finally, our Boat business delivered double digit adjusted operating margins for the 5th consecutive quarter, despite increased promotions and discounting on select product lines.

Speaker 2

And June Retail continued the strengthening upward trend. Freedom Boat Club continues to experience strong same store membership sales growth on a sequential basis and now has 400 locations and nearly 57,000 membership agreements covering 90,000 members network wide, all while generating exceptionally strong synergy sales across our marine portfolio. Shifting to external factors, Higher interest rates and prices continue to be a headwind for buyers, particularly of smaller product with boat loan rates recently exceeding 9%. Wildfires have also impacted an already softer Canadian retail market. From a dealer perspective, sentiment remains cautious.

Speaker 2

And while inventory levels for Brunswick's channel partners are healthy, dealers are proceeding with some caution and carefully monitoring sales as they plan replenishment. Discounting and promotional activity is close to our ad 2019 levels and is being successful in supporting retail in the height of the selling season. Our internal voter sentiment surveys suggest voting participation remains above prior year. Ripple, voting online community has now grown to more than 10,000 members. The positive retail numbers and peak season are very welcome.

Speaker 2

However, we do not see the fundamental pressures on consumers driven by elevated interest rates and higher prices easing in the short term. So we are taking a very balanced approach to production planning, while maintaining flexibility. Shifting to a global view of revenue. Overall, we saw a 7% sales decline on a constant currency basis, excluding acquisitions, including the impact of the IT security incident. Year to date, the U.

Speaker 2

S. Market is showing relative strength versus international markets with sales flat to 2022. From an industry view, U. S. SSI main powerboat second quarter retail unit sales improved sequentially from the 1st quarter.

Speaker 2

The main powerboat segment was down 6% versus the Q2 of 2022. However, preliminary June U. S. SSI was 2% above prior year. Brunswick performed better than industry relative to both periods, picking up share through strong performance by our premium fiberglass and aluminum brands, supported by planned promotions and marketing of select product lines.

Speaker 2

Output engine industry data was down 6% in the Q2 versus prior year. Mercury continues to outperform the industry The 2nd quarter share now above 50%, reflecting retail share gains of 5.30 basis points As we look at end of quarter pipelines, we see unit inventory levels recovered versus recent years, but still below the pre COVID level in 2019, particularly for premium product lines. As we look at the number of units in the pipeline on a boats per dealer basis, We see approximately 75% of our dealers with inventory levels less than or equal to 2019. Moving on to recent new products and innovation. As I mentioned earlier, we recently launched the Mercury Racing 500R, which delivers high performance fast luxury sport boats and it's incredibly light, weighing only 7.20 pounds The 500R replaces the 450R And joins the Mercury Racing high horsepower lineup that already includes the 300R and the new 400R.

Speaker 2

Earlier this year, we launched the award winning 7.5E Mercury Avatar Electric Outboard. We've now produced around 2,000 units, and we have strong orders from around the globe. We recently announced beginning of serial production for the next two models in the Avator lineup, the 20E and 35E, which We expect to begin shipping to customers at the end of the summer. The launch of the 500R and the production of the new Avator models Reinforce our intention to be the industry leader in both internal combustion and electric propulsion. Navigold Group continues to release exciting new products, but also software upgrades facilitated by the flexible Android based software Architecture deployed on its newest products and reinforcing the increasing importance of software and content upgrades as new sources of revenue and value creation for our business.

Speaker 2

Freedom Boat Club continues to expand rapidly, recently announcing its per week since the acquisition in 2019, including 40 international locations. We're also continuing to build out the Freedom ecosystem, including successfully expanding our Bottega pre owned boat business, which takes boats from Freedom, refurbishes them and resells them into the pre owned market. I'll now turn the call over to Ryan to provide additional comments on our financial performance and outlook.

Speaker 3

Thanks, Dave, and good morning, everyone. As previewed last week, Brunswick delivered a solid quarter despite the impact of the June IT security incident. When compared to prior year, 2nd quarter net sales were down 7% and adjusted EPS of $2.35 decreased 17%. Net sales benefited from pricing implemented in previous quarters and new product performance, offset by lower production and shipments resulting from the IT security incident, primarily in the Propulsion and Engine P and A segments and softer market conditions in value boat and lower horsepower engine markets. Adjusted operating earnings and margins were impacted by lower sales and slightly higher input costs versus the Q2 of 2022, but were partially offset by benefits from prudent cost containment efforts across the organization.

Speaker 3

Lastly, we had strong free cash flow generation in the quarter of $193,000,000 primarily due to stronger working capital generation, resulting in free cash flow conversion of 116% in the quarter. Year to date results also remain solid despite a slightly softer marine retail market and the impacts of the IT security incident. Sales are down slightly from the record first half twenty twenty two with the resilience in adjusted operating margin and EPS resulting from prudent operating expense control across the company, steady gross margin performance and in the case of adjusted EPS, continued aggressive share repurchase activity. You'll also note that each measure is greatly improved versus 2019, a testament to our continued successful portfolio management, operational excellence and capital strategy execution. Now we'll look at each reporting segment, starting with our Propulsion business, which delivered resolute sales and earnings despite being the segment most impacted by the IT security incident in the quarter.

Speaker 3

Revenue decreased 4% versus the Q2 of 2022 as benefits from pricing, favorable product mix related to continued Strong high horsepower outboard engine demand and higher sales to repower customers were offset by the impact Adjusted operating margins in the quarter were down 300 basis points as lower sales, higher input costs and the timing related to capitalized inventory variances, which you'll remember was an equal benefit in the Q1, offset very aggressive cost control. Production output of high horsepower engines continues to improve, which should enable second half sales growth. The Engine Parts and Accessories business delivered a steady quarter with sales down 13% versus 2022, but up 12% over the Q2 of 2019. Sales in our U. S.

Speaker 3

Products business decreased by 8.5%, but would have been essentially flat versus the Q2 of 2022, absent the IT security incident. Sales in our distribution businesses and international markets remained below prior year. Adjusted operating earnings and margins decreased due to the same factors, together with slight increases in input cost and the carryover of start up costs related to the newly opened Brownsburg Distribution Center, which collectively offset benefits from cost control measures. Note that July orders in the products business continue to trend positive as boat usage remains strong. Navica Group reported a sales decrease of 20%, driven by lower orders versus a very strong Q2 of 2022, together with slow recovery of RV OEM production, partially offset by strong new product performance.

Speaker 3

Segment operating earnings declined as a result of the lower sales and slightly elevated input costs, partially offset by As we look to the remainder of the year, orders for the aftermarket channel, which represents 2 thirds of Navco Group sales, Are showing strength versus the back half of twenty twenty two as retailer inventories are more normalized versus this time last year and sell through demand continues to be solid. We believe this tailwind will help offset Potential lag in marine OEM and RV orders as wholesale production in these areas are slower as manufacturers and dealers monitor inventory levels late in the season. Our Boat segment had another strong quarter, delivering steady top line and slight earnings growth, together with double digit adjusted operating margins for the 5th straight quarter. The $62,500,000 adjusted operating earnings in the 2nd quarter is the highest earnings achieved in any quarter in Boat Group history. The Boat segment reported a 1% decrease in sales due to the favorable impact of prior year pricing actions and favorable mix towards premium products being set by lower shipments of value products and higher discount levels, which are still within expectations.

Speaker 3

Adjusted operating earnings growth was enabled by the above factors, coupled with share gains and sustained operational productivity gains. Freedom Boat Club, which is included in business acceleration, contributed approximately 7% of the boat segment's revenue during the quarter. Our updated 2023 outlook matches our preliminary outlook shared last week. We are reiterating our full year adjusted EPS guide of approximately $9.50 with revenue of between $6,700,000,000 $6,800,000,000 and adjusted operating margins of approximately 14.5%. 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.

Speaker 3

Finally, we anticipate a solid Q3 where revenue should be flat to slightly below Q3 of 2022 and adjusted EPS of between $2.35 $2.45 This slide provides additional clarity on the components of our updated EPS guidance. The midpoint of our Prior EPS guidance range was $10.25 The components to get to our updated guidance of approximately $9.50 are With each of the following being estimates: $0.35 of loss and non recoverable earnings related to the IT security incident, primarily related to the downtime of high horsepower outboard engine production and missed engine P and A sales in the middle of the marine retail season $0.65 related to channel and market dynamics, where despite the U. S. Retail market given the uncertain macroeconomic environment and continued pressure on consumers domestically and in many international markets. As we're working toward the end of the prime retail season in northern climates, we anticipate slower channel fill in the back half of twenty twenty three in the face of these pressures and an uncertain 2024.

Speaker 3

Specific examples may include Boat dealers taking fewer value boats at the end of the season. Boat OEMs being satisfied with their ability to get 150 horsepower and under engine product and having sufficient supplies to satisfy late season boat orders and marine dealers and retailers restocking parts and accessories at a more reserved pace. And lastly, a $0.25 benefit from strong OpEx control, including acceleration of planned Navico Group integration and restructuring activities, benefits from new products and lower share count resulting from aggressive repurchases. Note that at an adjusted EPS of $9.50 would still be 15% higher than any result in Brunswick history aside from 2022. Lastly, we have a small handful of full year assumptions that we have updated.

Speaker 3

First, given our strong cash performance and continued Brunswick share price dislocation, We are increasing our repurchase target to exceed $250,000,000 of repurchases for the full year. Accordingly, our average diluted shares outstanding should be slightly lower for the year at 70,500,000 shares. We're also seeing a slightly better foreign currency environment as it relates to our global businesses and now anticipate a full year headwind of approximately $30,000,000 Please see the appendices of this presentation for additional information on other P and L and balance sheet assumptions for the year, which have not materially changed. I will now pass the call back over to Dave for concluding remarks.

Speaker 2

Thanks, Ryan. Before we close out, I want to share an update on some recent awards and recognition for our company, brands, products and people. We recently issued our sustainability report and we're delighted to be named by USA Today to the inaugural list of America's Leaders for 2023. We were among the 400 companies that made the final list out of the 2,000 considered. Brunswick was also named to the U.

Speaker 2

S. News and World Reports list of best companies to work for for 2023, 2024. We finished in the top 10 of all companies in the categories of best companies for work life balance and quality of pay. Mercury recently won 4 IF design awards for its new products, including 2 awards for the AVATORE 7.5E And one each for our V10 and V12 outboard engines. The IFF Design Awards are one of the most prestigious international design awards crossing all business sectors.

Speaker 2

In May, Brunswick received a record 11 2023 Top Product Awards from Boating Industry Magazine, Recognizing innovative industry leading new products from Mercury Marine, Brunswick Boat Group and Navicore Group. And 4 Brunswick female leaders were named by Boating Industry Magazine to its 2023 list of Women Making Ways, marking the 2nd consecutive year that 4 of our outstanding women leaders have featured on the list. Before I close, I'd like to remind you about our Investor and Analyst Day event on September 18, 2023 at the New York Stock Exchange, which will be followed by an opportunity to experience exciting new products and technologies from across our businesses on the water, as well as meet with members of our management team. Thank you for joining the call. That concludes our prepared remarks.

Speaker 2

We'll now open the line for questions.

Operator

Thank you. We will now be conducting a question and answer session. Pressing the star keys. One moment please while we poll for questions. Thank you.

Operator

Our first question comes from James Hardiman with Citi. Please proceed with your question.

Speaker 4

Hi, good morning. Thanks for taking my call. Obviously, what it sounds like you're Trying to take us down the path of and I think a lot of people are trying to do the math of how much of the revised guidance is The IT incident and how much is sort of what's going on in the channel and you've got some good slides in the deck that help us with that. I guess maybe if we think about the outlook on a segment by segment basis, right, you guys have got the slide where we sort of go through What you're assuming for sales and operating margins for each of those segments, each of them looks to be down versus the previous guide. I guess maybe walk us through what's IT and what's not IT in those segments.

Speaker 4

I feel like I can comfortably say That the propulsion piece on one end of the spectrum is almost all IT, whereas the boat piece on the other end of the spectrum seems like More demand and market dynamics, but maybe walk us through how to think about those various items.

Speaker 2

Thanks, James. Thanks for the question. Yes, I think the as you mentioned, certainly Mercury was impacted by the IT incident most and the issue there as we mentioned is recovery our ability to recover high horsepower. I think there was some kind of questions earlier in the year about whether Mercury could continue to gain market share, but you saw even on a rolling 3 basis, we're About 50% market share now, so demand particularly for high horsepower remains high. So our ability to recover that may be limited.

Speaker 2

Obviously, we'll be doing what we can. We're not counting on it. Broadly on P and A, we continue to see, I think, more modest spending. We didn't really talk about this much on a regional basis, but I would say it's probably overall better in the U. S.

Speaker 2

And slightly weaker in some of the international markets. Navico in particular though, although we said that Navico was not one of the most impacted areas By the security incident, we noted about $15,000,000 of revenue impact on other segments. The majority of that was NAVICO. So Navico was about $12,000,000 $13,000,000 of revenue and associated earnings in the quarter. Navico continues also to be impacted by the low recovery of RV.

Speaker 2

That's probably about another 15,000,000 of top line there for Navico. Our Boat Group is really about Inventory Restocking patterns, as you mentioned earlier, we're going to be extremely disciplined. We have been extremely disciplined. I think the first half Boat Group has been extraordinarily strong. Margins have held up really well.

Speaker 2

If you look at Q3 last For Boat Group, it was pretty strong. Margins held up reasonably well. Q3 is generally a weaker quarter for boats overall because of shutdowns. But we'll be reducing production in Q3 to try and make sure that we don't build inventory as we go into the back half. So Yes, Boat Group is certainly response to normalization of inventory levels.

Speaker 4

Got it. And then just as a follow-up maybe to that last point, and what's happening in the Boat Group. I mean, it's interesting Timing is interesting because it feels like we've seen better industry numbers as of late than we've seen in some time. But maybe tease out How much of the boat group guide down is actual demand, right? I mean, it seems like maybe the industry is now a little bit worse than you thought Versus how you think about weeks on hand to finish the year.

Speaker 4

I guess I should read into this that you think the channel is going to be leaner than you initially thought or is maybe there's Some of this that we're not seeing, maybe other brands are higher and so dealers are scaling back On everybody despite the fact that you guys seem to be in an okay inventory position.

Speaker 2

Yes, it's a good question. I understand how those are slightly contrarian kind of indicators. I think the this is kind of not just about the year 2023 2024, it's a bit about the shape of the year, 2023 2024. The overall year to date retail is trending a bit more towards Where we thought it would be earlier in the year and where we indicated it would be, but kind of at the lower end of that, I would say. That So then I think some other people thought the market might be.

Speaker 2

But because of high interest rates and because of dealer inventory levels and carrying costs, I think what we're expecting is that there is not a high incentive to carry a lot of inventory through the back half of the year. I think customers probably in towards the end of the season are going to be less willing to buy a boat And pay the interest fees through several months in the northern market where they might not be using the boat, Especially if they believe that boat availability is going to be better in the early part of 2024. In terms of inventory levels, I think there are quite a number of things for us to think about. 1 is the unit level on an aggregate basis. Another is the unit level by dealer.

Speaker 2

What we tried to show in that kind of histogram was Our dealers are not over inventoried at all by historical standards. In fact, 75% are below or at 20 levels and we do need them to keep a representation of good representation of our portfolio. But I think they are feeling the higher dollar value of the inventory. That's certainly a consideration for them. And they are cautious on the customer, I think.

Speaker 2

So I think we're going to hit a reasonable spot where we get good portfolio representation, but don't have dealers carrying what they believe are excess amounts of In terms of Wix on hand, that's probably going to be in the U. S. 35 So 40, maybe 35 plus, which should be roughly at the historical level On a kind of weeks on hand basis, but lower on a unit basis than kind of pre COVID. So I'm not sure if I exactly answered your question, but those are some of the considerations as we think about the back half of the year. We're very pleased with the performance of the Boat Group.

Speaker 2

I think The benefit of new models, the cost control, expense control, restructuring that we've done with the bulk group is really paying dividends, but we just want to set ourselves up for

Speaker 3

And Dave, the one thing I'd add is, we are outperforming the market as a whole and taking share in outboard Fiberglass outboard, pontoon and FISH. So in terms of James' question on vis a vis other manufacturers, we feel like we're more than holding our own.

Speaker 4

That makes a ton of sense. And maybe just to clarify, I apologize, I'm going to sneak in one more here. But just to clarify David's point on carrying costs And consumers maybe being hesitant in the off season. That kind of sounds like a cautious or a bearish outlook as we think about retail into the Q4. Is that the way I should read that?

Speaker 2

I wouldn't say it's particularly, Barish, I'll be honest with you, James, because by the time we get to the Q4, we're looking at 10% of total retail. We're already at 70% of retail for the season. So I think these relatively small number issues from the consumer perspective,

Speaker 4

Got it. That makes sense. Thanks, guys.

Operator

Thank you. Our next question comes from Mike Swartz with Truist Securities. Please proceed with your question.

Speaker 5

Hey, good morning, everyone. Maybe just a broader question on affordability And how you think about that, particularly on the boat side of the business going forward. Obviously, there's a lot of concerns near term with interest rates and affordability. But In terms of your pricing strategy for model year 2024 and I guess longer term, How do you think about turning that or moving that more in favor of the consumer, I guess, if you do at all?

Speaker 2

Yes, we had pretty modest price increases in 2024 like in the 3% to 4% range was typical across, but That doesn't, of course, represent transaction prices. Transaction prices are impacted by discounts and promotional activity. And obviously, we've been upping that level. So we have a lot of tools to try and It presents an attractive overall proposition to the consumer, and I think you've seen the impact of that. We've been kind of trying different mixes of those things, and I think we've settled on what works pretty well currently.

Speaker 2

And you saw the rebound particularly in Alumina Fish, which was down significantly earlier in the year and rebounded. I I think based on the kind of raw demand, but also on the fact that we were offering, I think, attractive proposition to consumers. So I think we're back to kind of good news is back to once a year and back to very normal levels of price increase, especially when you look at overall I think we do have a real advantage with the breadth of our portfolio. We have a lot of Entry points for any consumer into the marketplace. So I'm happy with the brands that we have that represent Different segments and kind of geographic orientations.

Speaker 2

If you look at how the market is down this year, Boats above 30 feet are really not that much tall. Boats in kind of 16 to 24 feet are the Bulk of the reductions. And so that's why we've been targeting a lot of our Promotions and discounts, this is really not about a kind of a uniform approach. It's about targeting the approach to the segment. And I think Based on recent retail, we seem to have found a good balance.

Speaker 5

Okay. And then just A follow-up. If I'm looking at the numbers correctly, I would assume that boat production in the second quarter was down year over Just given the pricing benefit you have running through the line there, but segment margins were up, I think, 40 basis points or so. Typically, I guess, we don't see that kind of dislocation when volume is down, margins are up. But maybe help us understand why that was?

Speaker 5

Was that just Positive price net pricing or is there something else to that in the quarter?

Speaker 2

I think Brian might be able to be more specific here, but I think certainly the benefits of historic Pricing that occurred last year, flowing through to this year, then we do have pretty good mix, I think, towards Some of our premium product that's probably helping. I don't know if there's anything else. Yes.

Speaker 3

No, those

Speaker 2

are the main two components.

Speaker 5

Great. Thank you.

Operator

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

Speaker 6

Thanks. Hey, guys. Good morning. First question, quick Housekeeping item, you mentioned earlier that the industry is trending a little bit worse than you thought. And I think your prior outlook for the U.

Speaker 6

S. Industry in particular Was units down mid to high singles? So just to be clear, it sounds like you're thinking industry down high singles for this year?

Speaker 2

U. S. Industry, yes, I think that's high singles maybe low double, maybe 10, something like that. I'd say that's probably where we are, yes.

Speaker 6

Okay. In terms of inventory, I think Ron you mentioned that you expect us to get back to 35 weeks plus. That's pretty close to where we were pre COVID, despite the fact that a lot of dealers want to hold less. So is that Overly optimistic or overly aggressive?

Speaker 7

Well,

Speaker 2

I think overall, we have more dealers for one thing. Obviously, we continue to expand our dealer base. But in terms of on hand, I think as you get lower in terms of absolute unit sales, There are some other kind of flaws that come into place and they're really around dealers really holding a representation a good representation of our portfolio. And that's what we tried to indicate on with that histogram that I referred to earlier. We do need Dealers to hold good representation of our portfolio.

Speaker 2

So even though we on hand Could be in the 35 plus area, units will be down versus pre COVID levels based in overall market at the

Speaker 7

moment. Okay. And when

Speaker 6

do you think we get there?

Speaker 2

I'm sorry, Joe, we'll get to

Speaker 6

35 weeks.

Speaker 2

So that's the year end number.

Speaker 6

Okay. Thank you, guys.

Operator

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

Speaker 5

Hey, good morning. Thanks for taking my question. You had some questions on the boat side with respect to the My question is on P and A. That business has been facing a destocking cycle for some time now. How far along in that cycle are we and might we get to the point where dealers are kind of replenishing, not dealers, but your retail partners are replenishing At a one to one level?

Speaker 2

It might depend a bit on the parts of the business, to be honest, Craig. But I think what we are clearly seeing, Navico aftermarket and retail stabilizing and even Increasing. One of the reasons is as we go into the season where we have Black Friday in the holiday season, dealers will begin to stock up again. So that's a typical pattern. So I would say for Navico, the destocking has Stabilize.

Speaker 2

And if anything, I would say we're going to enter a bit more restocking as we go forward. What we have Pro, that's ahead of the competition significantly. We see no hesitation by dealers to Hold that inventory. If you look at Navico overall, we 2 things are essential really for us to do with Navico. 1 was To get a lot of fresh products in the pipeline to support revenues and accelerate this restocking and We're beginning to do that I think quite nicely.

Speaker 2

The other was to get operating margins stabilized and I think we're doing that nicely too. On the Engine P and A and distribution side, I think we're coming into some easier comps in the back half of the year. So I think you'll see kind of Lower reductions there in the back half. I don't know, Ryan, if you have any comments.

Speaker 3

Yes. The only other item would be the Brownsburg transition, which It was a pretty it's a big task that we undertook in the first half of the year, just primarily complete and running at more full speed. So that's

Speaker 5

Got it. Thank you.

Speaker 2

Thank you.

Operator

Our next question It's from Matthew Boss with JPMorgan. Please proceed with your question.

Speaker 3

Great, thanks. So first, on your revised full year operating margin guidance, could you just help break down the factors driving 3Q margins to contract more than 100 And takes to consider on 2024 operating margins, just given your level of visibility today. Hey, Matt. I'll start on Q3. Q3 is off of a really strong comp last year, Really from all of our businesses, maybe aside from Navico Group, which actually has a bit of an easier comp.

Speaker 3

If I take it by segment propulsion, we anticipate to have stronger high horsepower manufacturing, which obviously comes at A good margin structure, so that would be the biggest driver there. As Dave just said, engine P and A is Coming off of really challenging first half comps, little bit easier in the second half, so that gives us some operating margin kind of stability. The boat group is always a third quarter is a bit challenged as Dave mentioned with the model year switchover and also shutdowns And most of our facilities that just have fewer production days, that also kind of gets better in the Q4. So you get to a number that's slightly below last year, which again was kind of a banner quarter. And that leads into the 4th quarter where I think the comps get a little bit easier from prior year.

Speaker 3

Propulsion, high horsepower production continues to be strong. You have A little bit more restocking in Navico Group and Engine P and A and the Boat Group continuing to operate well. The other item I'll mention is and we don't really talk specific brands very often, but Boston Whaler continues to Have a really nice run this year. Remember last year we were opening up and really getting underway a brand new facility, a second facility for the larger product That is now behind us and we're starting to see the benefits there. So despite lower production in terms of units, The production at Whaler and some of the premium continues to be strong and that gives you margin benefits both in Q3 and Q4.

Operator

With BNP Paribas. Please proceed with your question.

Speaker 3

Hi, guys. Thanks for the question. Maybe first, can

Speaker 8

you just share how many units you shipped in the quarter? I think you It sounded like it was down, but just if you had the number.

Speaker 3

Yes, just below 10,000, 97 ish.

Speaker 8

Okay, got it. And then the minus 6% retail, it sounds like you were better than that internally, but is it the magnitude like half like I think in the Q1 you were down 10 versus industry down 20, something like that. Is the spread still the same or how do we think about the outperformance in retail?

Speaker 2

Yes, I would say we were quite a bit better than I would say than the market In the quarter and in June. So I think we had strong performance across a number of brands. I think a lot of new products supported by some, I think, very appropriate and targeted promotions. So yes, we had a good Q2 and a good

Operator

June. Thank you. Our next question comes from Scott Steinberg with ROTH MKM. Please proceed with your question.

Speaker 9

Good morning. Thanks for taking my questions as well.

Speaker 3

Hey, Scott.

Speaker 9

Can we talk about, I guess, engine parts And accessories, you said that if you were to back out the impact from the security breach that you would have been Flat. Can you maybe talk about RV versus boat? And what the marine side would have looked like if You didn't have to contend with

Speaker 3

RV. Yes, I'll take that. The U. S. Products piece is primarily marine, almost all marine.

Speaker 3

So if you look at our comment there, that was really, Scott, a fully marine Number because that is kind of captive engine parts and accessories, if you would. Where RV comes into play, it's really Distribution in the Engine P and A segment as well as Navaco. So products being flat in the U. S. Absent the IT, it's really just marine.

Speaker 9

Okay, got you. And then on the repower side, Maybe talk about what you're seeing there, your expectations if we go into a tighter boat market, do you expect or are you starting to see people deciding that they

Speaker 2

There may be some of that. I think the biggest factor is just availability of high horsepower product for repower, which is something that we've not been able to We weren't able to supply really prior to the capacity increases that we introduced at the end of last year. So I think the repower is being improvements being driven more by the supply side than the demand side. There may be some demand creation, as you mentioned, because of people repowering versus buying new, but I'm not sure if we would Be able to kind of deconflict that. I would say it's almost certainly driven by supply availability.

Speaker 9

Got you. That's all I have. Thank you.

Speaker 3

Thank you.

Operator

Our next question comes from Fred Reichman with Wolfe Research. Please proceed with your question.

Speaker 10

Hey, guys. I just wanted to come back to the boat margin performance. Having 10% operating margins is something that you guys have really hung your hat on for a while. Obviously, the guide for this year calls for that to be a little bit lower. And I'm just wondering in sort of the out years, if you still think 10% is sort of the right margin profile of that business or if the floor is maybe a little bit lower than you had

Speaker 2

No, I think the in a more normalized market condition, above 10% is Very achievable and certainly our goal as we go out strategically, we were planning for margins significantly above 10%. It's obviously a very dynamic situation at the moment as we move from supply to demand constraint, if you look at us matching production to anticipated Retail, obviously, we're going to have to under produce retail at some point. So I think this is a Short term dynamic that will return to a very constructive trend longer term.

Speaker 10

And if you look at the chart that you provided talking about the Dealer breakdown in terms of inventories relative to 2019, is there any commonality among those 25% of dealers where Inventories are above 2019 levels. Do they skew towards 1 product category? Are they concentrated in one geography? Anything that sort of stand out?

Speaker 2

I don't think so. I think it's more statistical than Category based, I don't know if anybody else

Speaker 3

is No, that's right. It's just a lot of numbers there. I would say, again, Premium certainly, premium fiberglass inventories continue to be extremely low in the field. And so Most of that you would see as value based product, but again, there's no concentration of brand or geography in there.

Speaker 10

Fair enough. Thanks a lot.

Speaker 2

Thank you.

Operator

Thank you. Our next question comes from Tristan Thompson Martin with BMO Capital Markets. Please proceed with your question.

Speaker 7

Good morning. I have two Questions tied to 24, or effectively trying to look out to 24. If dealers are very cautious about carrying excess inventory Through the winter, how do you think they approach 'twenty four ordering? And then also, there's been a lot of moving pieces this year with the boat Kind of channel refill and the P and A destocking. Could you maybe quantify those just to give us a little bit of a better sense what a normalized run rate is?

Speaker 2

Yes. So on the first question, so we go through a pretty structured process Several times a year without dealers to align on restocking and that process is Going exactly to plan at the moment. There are no cancel major cancel orders or anything like that. We're just Kind of working through a normal process of aligning inventory levels. We don't I think the one of the considerations for us is we don't want dealers to have inventory that is not fresh.

Speaker 2

We want the tough products that are going to be able to sell as they go into the season. So it is in all of our interests To balance them carrying a good representation of our product portfolio With us all making sure that they have fresh product that we don't get into the RV situation Right now, we have dealers loaded up with 2 year old product. So the Process is proceeding exactly as it normally does every year. We're aligning on Inventory levels as we go into the off season, it's just a very normal process. We've all been through this before.

Speaker 2

This is not the first time. I want to ask what second question?

Speaker 3

Yes. Tristan, I mean, if you want to dimensionalize, I mean, our G and A business is still on a kind of year to year CAGR since 2019, they're still up 10% plus I think it's closer to 12% actually. So I mean, if you want to look at a normalized situation, that is some pretty strong growth there. I would tell you that Navico Group And a normalized situation probably outpaces Engine P and A, which is a bit more annuity and more constant. So you could kind of go back and look at the trend lines there.

Speaker 3

And then the vote is really just what we've been talking about a wholesale versus retail restocking story. When If you are retailing 30,000 then ideally once pipelines are filled, you want to wholesale Those 30,000, so that wholesale and retail match each other. That's probably the land we're living in starting next year. And so that We're probably at a spot where, especially in value product, 1 in, 1 out retail wholesale, we'll still catch up to do And probably a bias on growth towards the premium products of dollars will look better than units. Thank you.

Operator

Thank you. Our next question comes from Noah Zatzkin with KeyBanc Capital Markets. Please proceed with your question.

Speaker 7

Hi. Thanks for taking my question. Just a quick one for me. In terms of high horsepower backlog for new customers, kind of how much is left in the back half there? And how much of the remaining, I guess Propulsion Guide is satisfying existing dealers and OEMs.

Speaker 7

Thanks.

Speaker 2

Yes, there's quite a bit of backlog in high horsepower still. So we are still running flat out in At Mercury on high horsepower, obviously, in terms of satisfying existing OEMs and dealers, that to be a priority, but we're gradually transitioning other customers as well. And you've seen our Retail market share continue to rise as we begin to do that. So yes, we have good backlog still And continue to introduce new products to stimulate things like the 500R is a great new product That will also stimulate additional demand. So yes, the backlogs are strong.

Speaker 6

Thank you.

Operator

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

Speaker 2

Thank you. Thank you all for joining us. Thank you for your questions. As you've seen, despite some unique challenges in the We delivered another very solid quarter. We have very strong brands.

Speaker 2

We've continued to invest in products and technology and capacity, particularly in things like high horsepower upboard and premium boats and those are obviously strong parts of the market right now. We're also continuing with our Restructuring and cost control efforts, you've seen that particularly in the Navico Group, but of course, it's occurring across the enterprise To prepare us for some of the uncertainties going forward. It is notable, we didn't really talk about it, but Freedom Boat Club Hitting 400 clubs is very notable, but we see there's a market on a journey to A much higher number than that, so that's very exciting. Continues to be a market where it's difficult exactly to predict, We seem to be getting some relative stability and I think that hopefully allows investors to see a bit through the short term and more to Some of the really constructive longer term trends that we see and some of the secular benefits that we have in our business, which we will talk about and we're very excited to have you join us at our Investor Day in September in New York. I will provide an update on the strategy, talk about some of those secular long term growth drivers and

Operator

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your

Powered by Quartr

Key Takeaways

  • Brunswick delivered $1.7 billion in Q2 net sales and $2.35 adjusted EPS, down 17% as the IT security incident trimmed Q2 revenue by ~$80 million, yet generated $193 million of free cash flow (116% conversion).
  • The IT security incident disrupted Propulsion and Engine Parts & Accessories segments, but all global manufacturing and distribution were fully operational within nine days with total full-year revenue impact expected at $60–70 million.
  • Mercury Marine grew U.S. outboard retail share by 140 basis points YTD, launched the Mercury Racing 500R Outboard, shipped the first Avator 7.5E electric engines, and began serial production of the 20E and 35E models.
  • The Boat segment achieved its fifth consecutive quarter of double-digit adjusted operating margins, recorded its highest quarterly earnings ($62.5 million), and saw Freedom Boat Club expand to 400 locations with nearly 57,000 membership agreements.
  • Brunswick reiterated full-year targets of $6.7–6.8 billion in revenue, ~14.5% adjusted operating margin, ~$9.50 adjusted EPS, and increased its share repurchase plan to over $250 million.
A.I. generated. May contain errors.
Earnings Conference Call
Brunswick Q2 2023
00:00 / 00:00