Brunswick Q3 2024 Earnings Call Transcript

Quartr
Provided by Quartr
October 24, 2024

Key Takeaways

  • Positive Sentiment: Recurring revenue channels—including engine P&A, repower, Freedom Boat Club and Navigo aftermarket—contributed nearly 70% of Q3 adjusted operating earnings, underscoring portfolio resilience.
  • Negative Sentiment: Full‐year new boat retail unit sales are now expected to be down about 10% as elevated discounting slows dealer reordering and OEMs hold lower production rates.
  • Positive Sentiment: Engine parts & accessories delivered a record 26% operating margin, with the new Brownsburg, Indiana facility boosting efficiency, delivery times and modest international growth.
  • Positive Sentiment: Mercury Marine gained 420 bps of U.S. outboard engine share in Q3 (now 50% market share), demonstrating retail outperformance despite reduced OEM bulk production.
  • Positive Sentiment: Balance sheet moves increased both the revolving credit and commercial paper facilities to $1 billion, while strong cash flow supported $190 million in share repurchases and >80% free cash flow conversion.
AI Generated. May Contain Errors.
Earnings Conference Call
Brunswick Q3 2024
00:00 / 00:00

There are 12 speakers on the call.

Operator

Good morning. Welcome to Brunswick Corporation's Third Quarter 2024 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.

Operator

I would now like to introduce Neha Clark, Senior Vice President, Enterprise Finance, Brunswick Corporation. You may begin.

Speaker 1

Good morning and thank you for joining us. With me on the call this morning are Dave Foulkes, Brunswick'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 atbronswick.com. During our presentation, we will be referring to certain non GAAP financial information. Reconciliations of GAAP to non GAAP financial measures I will now turn the call over to Dave.

Speaker 2

Thanks, Neha, and good morning, everyone. Our businesses delivered solid results in the quarter as continued market share gains, wealth of new products and expanded contribution from recurring revenue businesses resulted in financial performance in line with expectations despite the challenging marine market. We continue to tightly manage field inventory across all our channels and have adjusted production accordingly, ending the quarter with 10,700 units in the U. S. Pipeline, around 200 units below prior year.

Speaker 2

Our 3rd quarter results again demonstrated the resiliency of our portfolio with our recurring revenue businesses and channels, including our engine P and A business, propulsion's repower business, Freedom Boat Club and Navigo Group's aftermarket sales, contributing nearly 70% of our Q3 adjusted operating earnings. As we enter the final months of the year, we estimate full year new boat retail unit sales to finish in line with our expectations of down approximately 10% versus prior year. With the core retail selling season behind us and retail discounting levels remaining elevated, dealer reordering in some segments is slower than anticipated, leading most boat OEMs to maintain lower production rates, impact propulsion and Navigo Group OEM orders. However, our aftermarket based engine parts, accessories and distribution businesses and Freedom Boat Club continue to perform well as boating participation remains strong. Prudent capital management remains a priority and we recently executed an amendment to our revolving credit facility, increasing the commitments to $1,000,000,000 and extending the maturity to October 2029.

Speaker 2

We also increased the size of our commercial paper program, permitting the issuance of commercial paper notes also up to $1,000,000,000 to provide further capital flexibility. In addition, our business has delivered strong cash flow, enabling us to complete $190,000,000 of share repurchases year to date and maintaining our commitment to return value to shareholders. Turning to some highlights from our segments in the quarter. As anticipated, our Propulsion business delivered lower sales and operating earnings versus the Q3 of 2023, but we continue to outpace the market at retail and gained 4 20 basis points of U. S.

Speaker 2

Outboard engine share in the quarter. We are currently producing at rates significantly below retail as OEM customers maintain reduced bulk production schedules into the off season. Our engine parts and accessories business had another strong quarter with record operating margins of 26% and with both the product and distribution businesses contributing to margin expansion despite slightly lower sales. The completed transition of engine, parts and accessories distribution to our new state of the art facility in Brownsburg, Indiana continues to provide efficiency and delivery time benefits, enabling modest international sales growth versus the prior year quarter. As anticipated, Navigold Group had lower sales and operating earnings versus the Q3 of 2023 due to continued soft marine OEM order rates and retailers delaying aftermarket orders until closer to the holiday selling season, which was partially offset by slightly higher sales in the Europe, Middle East and Africa region.

Speaker 2

Our pace of product investments is showing benefits, including at the recent Cannes Yachting Festival, where Navigo Group's products were present on approximately 70% of boats exhibited. I'll provide more details on Navigo Group new product introductions in a moment. Finally, our boat business had sales and operating earnings below the Q3 of 2023, consistent with lower planned production levels and fewer manufacturing days due to the extended summer shutdowns. Freedom Bulk Club continues to deliver steady performance with 3.5% year to date membership sales growth. In addition, we completed the acquisition of the South Florida franchise operations and territory, further solidifying Freedom's leadership position in the largest floating state in the U.

Speaker 2

S. And we expect to enter the Asian market in the near future. Navico Group is continuing to invest in and accelerate the introduction of new products developed since the acquisition. The Elite FS 10 inches and 12 inches fish finders with live sonar and full networking capability were launched today to fulfill the needs of consumers who desire larger screens with premium features at an affordable price. These products are amongst more than 20 new products introduced across the Navigore Group portfolio year to date.

Speaker 2

Some of these new products are launching in time for the e commerce and holiday season, and we expect them to contribute to some operating margin re expansion in the 4th quarter, while a number of white space products opening expanded market opportunities. In the Q3, we launched the new Lowrance Eagle I9, the 1st entry level fish finder in the market to offer live sonar capability. Even as we continue to rationalize its global footprint, we're also continuing to build Nabaco Group product development capabilities and expect to launch an additional 20 exciting new products over the next three quarters. Turning to external factors. While the macroeconomic landscape is stabilizing, with inflation continuing to moderate and employment generally remaining solid, we continue to monitor the escalating geopolitical tensions and election related activities.

Speaker 2

The downward movement in interest rates in the U. S. And some other markets since the beginning of the quarter is welcome and is already benefiting consumer financing costs and dealer floor plan costs. However, given the points in the current retail selling season, we do not anticipate benefits until 2025. Dealer sentiment is generally stable, but negative with ordering remaining cautious in most segments.

Speaker 2

We do not anticipate any significant change entering the off season curtailment holiday. Discounting and promotion levels remain elevated. However, our investments in our digital assets continue to drive solid lead generation and conversion. Despite these challenging conditions, our surveys do show some improvement in bulk purchase consideration, particularly among higher household income consumers. We continue to invest in and launch many exciting new products and technologies across all our businesses and product lines with the intent to position us for market share gains and to ensure we have the freshest portfolio when the market returns to growth.

Speaker 2

As we all know, at the end of September early October, Florida and the Southeastern U. S. Experienced 2 major hurricanes. While Brunswick has a strong presence in Florida, it was only a minor direct impact to our facilities, So production and distribution halted at some locations for approximately 3 days for hurricane preparation and in a few cases for power outages. Brunswick supplies in the region were also largely unimpacted.

Speaker 2

Of the approximately 100 corporate and franchise owned Freedom Boat Club locations in Florida, only 4 will remain closed for infrastructure repair exiting October. Some Brunswick channel partners incurred damage to their facilities, which in combination with direct impacts to boaters and consumers in the area will have a modest short to mid term impact. We estimate a full year operating earnings impact of $5,000,000 to $10,000,000 Brunswick is providing financial support, supplies and essential needs to impacted employees and communities. Moving now to U. S.

Speaker 2

Industry retail performance. U. S. Outboard engine industry retail units declined 10% in the Q3 versus prior year, with Mercury Marine outperforming the industry at down just 1.8%. As mentioned, Mercury Marine continues to gain share, delivering approximately 50% U.

Speaker 2

S. Outboard engine market share in the 3rd quarter. We are diligently monitoring both pipeline levels and continue to under ship retail, exiting the Q3 with 10,700 units in U. S. Pipeline, slightly below prior year.

Speaker 2

We ended the Q3 at 32 weeks on hand, with premium fiberglass pipelines remaining well below historical levels. 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. SunTek's 3rd quarter results were in line with expectations, but remained below prior year due to the continued challenging U. S. Retail marine market. Versus the Q3 of 2023, net sales in the quarter were down 20%, with adjusted operating margins of just under 10%, resulting in an adjusted EPS of $1.17 As mentioned, our results in the quarter again demonstrated the resiliency of our portfolio with our recurring revenue businesses and channels contributing a significant portion of the operating earnings this period.

Speaker 3

3rd quarter sales were below prior year as the impact of continued lower wholesale ordering by dealers and OEMs combined with higher discounts in certain business segments was only partially offset by annual price increases and benefits from well received new products. Operating earnings were down versus prior year as a result of lower sales and the impact of lower absorption from decreased production levels, partially offset by new product momentum, annual price increases and ongoing cost control measures throughout the enterprise. On a year to date basis, sales are down 19%, resulting in an adjusted diluted EPS of $4.31 down 41%. Gross margin performance remains steady despite the top line softness, while operating expenses are down more than $50,000,000 versus 2023 levels even after absorbing the impact of acquisitions as the entire enterprise remains focused on reducing controllable costs. As a reminder, we are making conscious decisions to ensure field inventory levels for all our businesses remain appropriate and have scaled production accordingly.

Speaker 3

Year to date production for outboard engines 75 horsepower and above is down 29% versus 2023 with boat production down 34%. Now we'll look at each reporting segment starting with our propulsion business. Sales in our propulsion segment were down 32% with lower production rates at OEM Boat Manufacturers resulting in lower engine orders in the quarter versus the prior year quarter. As Dave mentioned earlier, despite lower wholesale orders as we anticipated, we continue to take market share and outpace the overall market performance. Adjusted operating margins were below prior year, primarily due to the impact of lower net sales and lower absorption from declines in production, partially offset by cost control measures.

Speaker 3

Our aftermarket led engine parts and accessories business had another strong quarter with record adjusted operating margins leading to strong operating earnings growth versus the Q3 of 2023 despite slightly lower year over year sales. The completed transition to our new state of the art facility in Brownsburg, Indiana continues to provide efficiency and delivery time benefits, which enabled modest international sales growth versus the Q3 of 2023. Our U. S.-based land and sea distribution business also continues to take market share, gaining 60 basis points of share in the last 12 months, culminating in September where they delivered their highest ever single month market share of just under 50%. Navica Group reported a sales decrease of 14%, primarily driven by reduced sales to marine OEMs resulting from lower boat production levels to match retail ordering patterns, partially offset by slight international sales growth and strong new product momentum.

Speaker 3

Segment operating earnings decreased as the impact from lower sales was only partially offset by lower operating expenses. Finally, our Boat business had sales and operating earnings below the Q3 of 2023 consistent with lower planned production levels and fewer manufacturing days due to the annual summer shutdowns. Sales were down 19% resulting from lower wholesale orders as channel partners continue to order cautiously and higher incentives and discounting were only partially offset by the favorable impact of modest model year pricing. Segment operating earnings were within expectations as the impact of net sales declines and lower absorption from the reduced production was partially offset by pricing and continued cost control. Freedom Boat Club, which contributed 12% of the segment sales in the quarter, continues to deliver steady membership sales growth and completed its acquisition of the Southwest Florida franchise operations and territory, further solidifying its leadership position in the largest boating state in the U.

Speaker 3

S. Turning to guidance, we are not anticipating any change in market conditions for the 4th quarter and are responding by continuing to moderate production to ensure inventory levels in the channel remain appropriate, setting us up for what we anticipate as a stronger 2025. In addition, we anticipate boat dealers remaining cautious in taking on product before early 2025 boat show season, especially knowing that we have manufacturing capacity available to get them product early in the 2025 retail season. Similar to our own boat business, OEM customers of Mercury and Navico Group to moderate production, resulting in softer wholesale conditions. As Dave discussed earlier, a modest negative earnings impact from hurricanes that impacted Florida and the Southeast U.

Speaker 3

S, our recurring revenue businesses continuing to remain steady, albeit with normal seasonality impacting sales volumes, and lastly, Q4 production continuing to trail 2023 levels. The result is the guidance you see on this slide including net sales of $5,100,000,000 to $5,200,000,000 and adjusted diluted EPS of approximately $4.50 Free cash flow continues to be solid despite the lower earnings with free cash flow conversion expected to be north of 80% for the year. I will now pass the call back to Dave for concluding remarks.

Speaker 2

Before we conclude, despite the challenging market, I am thrilled to highlight the exceptional accomplishments of our teams from across the enterprise that were recognized with a record high number of awards in the Q3. We've now surpassed 100 major enterprise awards for the 3rd consecutive year. Brunswick was named one of the world's best companies by Time Magazine, and we continue to win global awards for our products around the world. Sea Ray won the Moteur Boat Magazine Motor Boat of the Year Award for its new 190 SPX model. Moteur Boat is the largest marine publication in France.

Speaker 2

Also, Flight recently took home 4 Australian Good Design Awards, including a best in class winner for its Mark Newsome collaboration. During Ibex in During Ivex in October, Navigo Group won the Ivex Innovation Award in its category for the Lenco Pro Control Boat Stabilization System. And Mercury received an honorable mention in the same category for its new precision joystick system. And finally, safety on and off the water remains our top priority. So it was very rewarding to receive 4 national boating safety awards, 2 for our boat class business and 1 each for our Freedom and Bayliner brands.

Speaker 2

Finally, we are very excited about the upcoming Fort Lauderdale Boat Show, at which we will be debuting many industry leading new products. Boston Whaler will launch the all new 330 Vantage, the new flagship model in the popular Vantage series. Sea Ray will show 3 all new models in its SDX line, all powered by Mercury outboard engines. And we will officially debut the first models in our new Navan premium adventure product line in the U. S.

Speaker 2

Thank you for your attention. We'll now open the line for questions.

Operator

Thank you. We will now be conducting a question and answer you. Our first question is from Matthew Boss with JPMorgan. Please proceed.

Speaker 4

Great, thanks. So maybe first question, Dave, could you speak to any changes in customer demand or any changes in dealer sentiment that you've seen recently? And just if you could elaborate on the drivers of the stronger 2025 setup that you cited?

Speaker 2

Yes. Thanks, Matthew. Yes. So, I think retail is pacing pretty much as we expected to down about 10%. September for us actually came in a little bit stronger, so that was nice to see.

Speaker 2

But generally, that kind of minus 10% at a consumer level is what we're seeing. I wouldn't say that there are wholesale changes in OEM demand kind of across the board, but we are seeing a bit of weakening in Europe, which has held up a bit better. That tends to be a little bit more of a premium market certainly for us. There's some weakening there. And we did want to derisk a bit the balance of the year just because we have just not quite got under some of the OEM kind of pipeline dynamics previously.

Speaker 2

So I mean you've seen even in some public companies some changes in kind of the dynamics that you'd expect for the balance of the year. So while we're not seeing significant further production reductions, I think this is a bit more of a derisking exercise for the balance of the year. One thing that is clear at this point in the year is that we do not want to overstock pipelines. And so we're not intending to do kind of a lot of year end programming that would potentially pull wholesale out of early 2025 and into 2024. So those are some considerations.

Speaker 2

There will be modest impact from the hurricanes that went through Florida. Obviously, there are a number of people that were affected and we all hope that they recover very quickly. But we would expect some kind of West Coast of Florida demand impacts based on hurricane impact on our channel partners and also on end consumers. You want to talk about Yes.

Speaker 3

I'll take 25. Good morning, Matt. How are you? It's Ryan here. 25, I think our story is pretty similar to what it was on the July call, maybe just moved up 90 days or so.

Speaker 3

We still think that 2025 on balance is likely to see healthier economic conditions for our consumers, lower interest rates, unemployment that continues to be relatively low, GDP that is continue to be positive. Obviously, a little bit of uncertainty here in the next 90 days, certainly with the election, maybe extending into the Q1, but all in all, macros and consumer probably in the plus column. And then you have to ask yourself what you think the market is going to do, the marine market. We're going to end the year this year at about 140,000 units here in the U. S, which is really only about a handful of percent above where we were on a unit basis coming out of the GFC.

Speaker 3

And so we all think it's relatively reasonable to assume that a flat market to this year is definitely doable with probably an upside from there. And time will tell what that looks like low single digit, mid single digit, but certainly probably a little bit biased to the upside from a market. Certainly, when you look at retail being about 50% of replacement level, which continues to be at. And then you add into a positive pipeline dynamics. In most scenarios, even in a flat retail market next year, we would assume that wholesale would be up for us in both boats and engines.

Speaker 3

And again, how much up would depend on where it lands at the end of this year and what you think retail does. But we still think wholesale would be up. And then lastly, I'd say there's a few things that Brunswick just is unique on. We have market share gains with Mercury, with new products on the horizon, continued stable growth on Engine P and A. I don't think we talk about it enough or give it enough credit.

Speaker 3

This is a business that had 26% operating margins in the quarter, a record and continues to drive recurring aftermarket earnings and revenue for us. That will continue to drive stability next year. Significant new products, you've heard from Dave on things that are just coming out over the next handful of months and that will continue into next year. I think we've taken $100,000,000 of OpEx out from our original budget this year and we're down $50,000,000 year to date and that's including absorbing about $20,000,000 of acquisition impact. We'll be able to keep a portion of that out.

Speaker 3

Obviously, some things will come back in, including reset of comp, a tariff environment that may be a little worse. But on balance, still good from a cost perspective. And then we continue to drive cash. I think a lot of the things we're doing here in the back half of twenty twenty four will give us cash benefits this year, but also cash benefits next year, which will be helpful certainly in whatever environment where that's thrown at us. So on balance, I do think there's more reasons to think that 2025 is a growth year for us on EPS.

Speaker 3

I think it would be second half based and second half loaded as comps get a little easier and the economics of the health of the consumer seem to be better, but that's still where our heads at that 2025 is a growth year off of 2024.

Speaker 4

Great. And then maybe Brian, just a follow-up. So on a flat retail sales backdrop for 2025, how are you thinking about pricing and promotional landscape? And any change to 20% incremental margin as we think about the front half versus the back half loading?

Speaker 3

Yes. Matt, I would say that your incrementals or your leverage will be better in the second half certainly, just the way that the calendarization of earnings would likely go versus 2023. But from a pricing standpoint, we are still planning very modest pricing increases across our portfolio. That would be the 3rd year in a row that we've done very modest increases both boats and engines. And the price to our end consumer continues to be helped by elevated discount levels as well.

Speaker 3

So you can have a lot of places where the price of the consumer is paying for the same product is actually equal to or even less than what it would have been or what it was 12 months ago because of discounting. So we will take a little bit of price at wholesale, but it will be very, very modest.

Speaker 4

Great. Best of luck.

Operator

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

Speaker 5

Hey, good morning, guys. So, great line of questioning there and I think some great answers. I wanted to dig in a little bit more on the inventory piece. So it seems like retail is playing out largely as you anticipated 90 days or so ago. And yet we've got a pretty steep cut to the Q4.

Speaker 5

So should we interpret that as you expect to finish the year even lower on inventories than you previously did? I think there was some discussion about a 1500 unit reduction for the year. Where does that number stand today? And

Speaker 2

I

Speaker 5

think the answer to this is yes, based on what you said in the previous response, but 1 to 1 wholesale to retail is the general sort of assumption for next year as we sit here today?

Speaker 3

Yes, James, this is Ryan. I think that's a good assumption to start the year. You are correct on your global boats being wholesale exceeding retail by about 1500 units, it's about 1,000 in the U. S. So pipelines, we wholesale, trailing retail about 20,000 units on the engine side in the U.

Speaker 3

S. Just as another number. So I don't think there's been any change really in our view on pipelines except to make sure that we're balancing with the retail environment that's shaping up as we anticipate. The real change, as Dave said, is I think the last quarter is going to be just very cautious in terms of orders from our channel partners across the entire product display. We're just seeing cautiousness because we have the ability to get them product quickly.

Speaker 3

We can get folks product here at the beginning of the retail season. If boat shows end up outperforming, maybe an initial expectations, we can get boats out quickly in the beginning of the year. So all of that is leading to just cautiousness in the in our channel and we'll be ready to supply product once the orders come in.

Speaker 5

Understood. And then to the question on 2025, it sounds like you're confident that it should be up next year on an earnings basis. I think you're pretty confident about that 3 months ago. Now $0.24 has come down, call it $0.75 And so I guess I'm trying to think through should we be lowering them is the view on 2025 today any lower than it was 3 months ago or how should we think about that in light of the cut to 24? Does that impact 2025 in any meaningful way?

Speaker 2

Yes, I think one way to think about it is that in the end, retail is what matters. The wholesale is a dynamics issue. Year over year, how we build pipeline, how we complete pipeline, all those things. Retail in the end is what matters. And what I think to some extent, you could say that if we get out of the situation of promoting products to get sales in and hopefully we'll pick up some sales early next year that might have occurred in this year, which will help the year over year a bit.

Speaker 2

But I would anchor back to what retail is in the end. I think we have decent expectation that retail will be flat and pipelines really are incredibly low at the moment and have been going down and down and down and we've been fighting probably more with certainly a bit with the retail dynamic, but probably a bit more with the wholesale dynamic than we have with retail. So as long as retail holds in, I think there's every reason to believe that the balance of probability is that we will that will be constructive for EPS.

Speaker 5

Got it. Thank you very much.

Operator

Our next question is from Megan Alexander with Morgan Stanley. Please proceed.

Speaker 6

Hi, good morning. Thanks for taking our question. Maybe just to follow-up on James' question there, just to clarify, are you still expecting Global Week's on hand to finish this year at, I think, around 40, which is where you were thinking last quarter and maybe you can tell us where that is today?

Speaker 5

At the

Speaker 2

end of the quarter, I think it's 32 weeks we came out of the quarter and that's

Speaker 3

Yes, 32 in the U. S.

Speaker 2

32 in the U. S. Will probably end up in that will end up in the high 30s by the end of the year. I think the exact weeks on hand is getting a bit more difficult to predict because the unit implications of 1 week on hand is now like 200 or 300 units. So I would just say that it remains in the high 30s in the U.

Speaker 2

S. And probably pipelines are always a little bit higher in Europe, particularly in some other regions. So we'll probably end up in the 40 ish range globally, yes.

Speaker 6

Right. So just to clarify that hasn't really changed. Your thinking around pipelines and weeks on hand hasn't really changed since last quarter.

Speaker 2

No, I think that's correct. I think that we're we continue to be focused on setting up for 2025. And we'll make sure that we continue to monitor. And obviously, our we're trying to derisk the rest of the year in every way that we possibly can. And if retail I mean, we're essentially probably 90% through the retail, probably 95% no, more than 95% through retail, probably close through retail.

Speaker 2

So, yes, retail impacts are going to be pretty modest from now on. So we'll just continue to modulate production. Maybe one point would be, obviously, we talk about weeks on hand, which is a kind of global number, and it's not as though inventory is kind of homogeneous and fungible, it isn't. We are still historically low on inventory levels for premium product. So there is still some room to go, with building premium products up to a level that we'd be probably more comfortable with as we go into 2025.

Speaker 2

But for our value and kind of core product, I think we are where we want to be.

Speaker 6

Got it. And maybe I know this question has been asked in the past and maybe you can just help me understand a little bit more of if you're ending high 30s, I think that's maybe where it used to be, not any worse. So in order for wholesale to be above retail next year, that seems to imply that weeks on hand are going up, so or would go up. Am I thinking about that the wrong way? Can you kind of just help square why you think that there could be the potential to ship ahead of retail in 2025?

Speaker 2

Yes. I mean, we produced I mean, retail will be down about 10% this year. Our wholesale is down 25% to 30%. Production is down about 30%, wholesale is down about 25%. So for flat retail next year, we'll need to reaccelerate so that wholesale would be, for example, at the down 10% level.

Speaker 2

I mean, not down next year, but basically equal to retail would require a reacceleration of wholesale. And we're down, so when we continue to manage down, I think we have about 13,000 units in the pipeline at the end of this year versus also to 14,000 last year. So we have some production catch up to do and some inventory catch up to do.

Speaker 3

Yes. Just to be very clear, Megan, the comment was that next year wholesale in 2025 could be ahead of wholesale in 2024, not that wholesale in 2025 would be above retail in 2025. That would be unlikely. I think the main point, as Dave said, is wholesale trails retail by a significant amount this year. And if we go 1 in, 1 out next year for making retail equal wholesale, that would mean wholesale gains.

Speaker 3

So just want to be very clear, we would not anticipate weeks on hand increasing next year.

Speaker 6

Yes. Okay. That's helpful. That makes a lot of sense. Thank you.

Operator

Our next question is from Fred Wightman with Wolfe Research. Please proceed.

Speaker 7

Hey, guys. I just wanted to touch on the Mercury share gains. I think you said that you gained 400 basis points in the quarter. I'm wondering if there's anything one time in there to call out or not?

Speaker 2

Yes, I would say it was a good quarter for us, Brett, but I would say the 130 basis points year to date is the thing to focus on. Really, we mentioned that in this environment, there are a lot of unusual dynamics as OEM production modulates to protect inventory and other things in the balance of the year. So obviously, it's really exciting when we see numbers like 400 basis points and we have a great product line. Especially since our competitors have launched some product in the last year or so. It's nice to see us continuing to do well on share.

Speaker 2

We expect to continue to do well on share at the upcoming Fort Lauderdale Boat Show. But I would probably anchor a bit more on the 130 basis points year to date.

Speaker 7

Okay, that's fair. And shifting to Navico, Ryan, I think you said that you're expecting that to be up year over year in Q4. And I know that there's been some timing shifts just from a retailer aftermarket perspective with the holiday. But do you think that that's a big inflection? Do we feel like things have sort of stabilized or bottomed out there?

Speaker 7

And should we be positioned for growth into the future as well? Or is that not the right way to think about it?

Speaker 3

No, I think that's fair. And Fred, I don't think it's a huge inflection. I mean, Navico has showed some stability across the board. You saw some really actually pretty stable aftermarket sales in Q3. The OEM side, both marine and RV does continue to be down, which should be surprising given the OEM sluggishness around the rest of the portfolio.

Speaker 3

But Q4 has the opportunity to be kind of marginally up in sales and delivering better earnings and better margin. I think the new products are really what drives the NAVCO success from here on out. It's not going to be overnight, it's not going to be immediate, but additional new products that continue to come out certainly ahead of Black Friday, which for Navica will be an important kind of milestone does give us some confidence in the Q4. But I wouldn't expect a huge inflection, but certainly stability quarter over quarter growth on top line and earnings and margin from Q3 to Q4 would be fair to expect. And then from a year over year comparison, probably a little bit of the same, although the Q4 last year is obviously a tougher comparison than Q3 of this year.

Speaker 7

Fair enough. Thank you.

Operator

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

Speaker 8

Hey, good morning. Thanks for taking my question. Dave, you mentioned a survey that you've conducted with both consumers. I'm just wondering if you could shed some light on any more details about purchase intent. And I'm curious how predictive that survey has been in the

Speaker 2

past? Yes. Hi, Greg. Yes, we do monthly surveys of around about 400 voters and intending voters, and we understand what their demographics are. So we try and look at patterns of behavior.

Speaker 2

We ask them a number of questions about what's influencing their behavior. And this time, I think we saw a kind of core and value voters, purchase intent remains stable, but higher household income go up. I don't offhand have exactly the kind of percentages with me. I would say that there's clearly going to be some element of latent demand building at the moment, But people are just on the fence this year, may contemplating higher interest rates, contemplating uncertainty in the trajectory of the interest rates, contemplating the election outcomes and other things. So I do think once we get on the other side of that, we will see some latent demand that I would expect that to come through first in the more premium segments, which is essentially what we're beginning to see.

Speaker 2

So possibly the more positive sentiment was driven by the Q3 interest rate cuts. Those the 50 basis point cut has translated to about 100 basis points of cuts in both financing rates. So loans over $100,000 now are down to about 700 and about 7.5%. They were in the 8.5% to 9% range previously. So we have seen good things generally happening in terms of financing costs.

Speaker 2

And then obviously, there are additional promotions available. So we are excited about Fort Lauderdale coming up. That's a premium show, and it will be good to see how consumers behave at that show. Thanks, Dave. Thanks, Craig.

Operator

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

Speaker 9

Hey, guys. Good morning. Maybe just first question, and I

Speaker 2

think you've talked about this

Speaker 9

a number of times, but the Engine Parts and Accessories business, the big step up in operating margin in the quarter, I think you called out it's the highest quarterly margin in company history. But can you just give us a sense of I guess how much of that is sustainable? I know there's a lot of seasonality here, so I don't expect 25%, 26% margins every quarter. But just give us a sense of like how much of that is sustainable structural versus maybe some there's some inter quarter one time ish type things that you saw?

Speaker 3

Yes, Mike, I'll take this one. Yes, I mean, obviously, great quarter. Just highlighting the stability here of this business. I do think this is a business that's marched right up to 20% operating margins for the full year. And obviously, that's a pretty good milestone.

Speaker 3

A lot of it just depends on mix within the distribution versus product side. Obviously, the products part of business holds some really strong gross and operating margins. And distribution, although it's pretty strong third party distribution business, it is still third party. So it's a sell through business where margins are lower. So a lot of the quarterly dynamics depends on where you stand from a distribution versus products mix standpoint.

Speaker 3

I will say the one thing that's really shown through is the transition to Brownsburg, Indiana is complete and we are now getting more product out quicker at a better cost. And all three of those things are beneficial to margins, right? More product out quicker and being able to go around the world, so to our international customers. So, yes, it's fair to say you're not going to see 26% every quarter, but certainly where there's value, we now know that we can get the product out at the right cost, and get it out quickly so that our channel partners have what they need. So you should anticipate continued margin stability and growth there as we go into 2025.

Speaker 2

We've taken quite a bit of cost out of our business. It's very efficient. I would say that the maybe the weather in the late summer and fall has been pretty nice. And actually, even in October, we're seeing some really good floating activity. So that's possibly a part of a boost as well.

Speaker 10

Okay,

Speaker 9

great. And just following up on I think Brian, you had mentioned before you've taken out about $100,000,000 costs from business this year. How much of that should we expect to come back and let's say a flattish retail environment?

Speaker 3

Yes. And $100,000,000 versus our initial budget, right? So the number to think about from 2023 is more like $50,000,000 or so. But again, that's absorbing $20,000,000 of OpEx from Flight and Freedom Boat Club deals that were completed in 2023 and we have the cost in 24. I would think that you could keep $30,000,000 to $40,000,000 of the OpEx as stays out until further notice.

Speaker 3

Now these are things that we would like a lot of them are things we'd like to add back in. Over time, it's things that make the businesses run better, whether it's IT or sales and marketing support. So it's not like we'd like it out forever. But certainly as you look at early 2025 and early 2025 in general, dollars 30,000,000 to $40,000,000 of that can stay out until the market picks back up and we're able to generate more sales and cover those costs.

Speaker 9

Okay, great. Thank you.

Operator

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

Speaker 10

Hi, guys. Thanks for the question. I wanted to ask on the 4Q propulsion margin. It seems like implied to be pretty low relative to the historical. I'm just curious on what's kind of driving that step down in propulsion margin next quarter and how you think about, I guess, the bounce back next year or potential for bounce back?

Speaker 2

Yes. I think volumes will be down like 25% year over year. So absorption is going to be a big component of margins there. I would say that mix is generally staying at holding it pretty well. So probably absorption is the biggest component there.

Speaker 3

It definitely is. And we were still filling pipelines of 175 to 300 horsepower in Q4 of last year. We're more we're 1 in, 1 out with retail this year. So that's the other main driver. But production in Fond du Lac rightfully is down significantly in the Q4 because we want to protect an inventory level to be ready for 25, and that does carry with it negative absorption that's hard to overcome when you don't have the volume.

Speaker 2

Yes. On the more positive note there, you can't take headcount out exactly when you want to take it out. It takes a little bit of time. So some of the headwinds here are trailing headwinds that won't recur in the Q1 of next year, for example, when the headcount will be out. So there's a little bit of a transition element in here that makes absorption incrementally worse than it might have been had everything been kind of instantaneously corrected for lower volume.

Speaker 10

Okay, got it. And then on Europe, I think you mentioned weeks on hand are a bit higher internationally and you saw a bit of a weakening there. Any kind of thoughts on where you would like to take, I guess, international pipelines? And do we need to kind of destock further into next year?

Speaker 2

The international is always a little bit higher, and we are doing exactly the same thing for Europe that we're doing over a year in terms of controlling our pipelines to the overall right levels. If you think about the I mean in Europe, in the U. S, we produce a lot of our product close to where we sell it. In Europe, that's not quite such the case. So we just have a lot more inventory around just for transit and other things.

Speaker 2

So we're not in an unusual situation on pipelines, but continuing to take the right level of action.

Speaker 10

Okay, thanks.

Operator

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

Speaker 11

Thanks. Hey, guys. Good morning. Just want to go back to inventory for a second. I think you mentioned you're at 32 weeks here in the U.

Speaker 11

S. And year end you're expecting to be high 30s and I think you were at 37 last year. If you look at other industries, whether it's RVs or power sports, they all seem to be moving toward a more efficient inventory model and holding less weeks on hand. Are you seeing any pushback from your dealer partners that that's the case?

Speaker 2

I think we collaborate, Joe, with our dealer partners in setting inventory levels. I think what is essentially happening is because the market is so low at the moment, there are other considerations in terms of inventory quantities that might be present at a much higher market level. At a much higher market level, we might look just globally at weeks on hand, or at least certainly by segment weeks on hand. But if you now if you think about the level of inventory at around 13,000 units, it is low. On an absolute basis, it's low, which means that other considerations like how many boats we have per dealer become much more important.

Speaker 2

There's a certain threshold. And we have probably more than 1,000 dealer locations in the U. S. So if they all have 10 boats, then it's 10,000 boats, and we want them to have a good representation of our product lines. Many of them carry multiple product lines.

Speaker 2

So as inventory levels become lower, I would say, they are not going to continue to fall as fast as they might otherwise. In terms of efficiency, I don't maybe there are other factors at play in other industries, but for us, dealers in a lot of cases are specifying option contents and colors and stuff on inventory. So we need to align them with specific dealer orders. So I am not anticipating, as we saw in COVID, where dealers were selling production slots versus product on the ground, but we are going to see a statistically significant change in kind of long term weeks on hand.

Speaker 11

Okay. That's helpful. And just kind of a follow-up on that. Can you speak to the decision that you made to pull back on promotions in Q4? I think you wanted to avoid what you called excessive wholesale pull forward.

Speaker 11

Were you seeing an indication that dealers were actually looking to take orders up in Q4?

Speaker 2

No, I don't think we particularly were, but essentially a couple of things to think about. I mean, I'd rather be selling dealers boats when there's pull for them versus pushing them at dealers. And I think as soon as dealers feel they don't have enough inventory, there'll be plenty of pull. And then the other thing is, we don't want to get into this situation of learned behaviors where dealers just waiting for the next promotion, whatever it is, to do orders. We have to kind of break that habit and now is a good time to do it, I think.

Speaker 11

Okay, got it. Thank you.

Operator

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

Speaker 2

Thank you all very much for your questions. They're really appreciated. I think given the market conditions, I think we've used our controllable levers to come close to maximizing the potential of our business in Q3 2024 and also position us very well in terms of inventory levels in a very fresh product line for 2025. Obviously, Hurricane Selene and Milton were an additional unwanted headwind in the quarter, but the direct impacts to our business were relatively minor. We do hope that the individuals and families and businesses that were more severely impacted by those hurricanes recover quickly.

Speaker 2

As you will have seen in the quarter, we executed a sequence of senior leadership changes with the intention of broadening the experience of our most senior leaders and also accelerating some aspects of the Navico Group strategy. So pleased to get that done and the new leaders are settling in extremely well

Speaker 7

with

Speaker 2

a lot of enthusiasm. So I'm very excited about that. We're also very much looking forward to attending the Fort Lauderdale Show next week, where as I said, we'll debut a big range of exciting new products from a number of our brands that we keep investing in those products to set up for 2025. Thank you very much.

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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