Q3 2019 Earnings Call

GAAP financial measures are provided in the appendix to this presentation and the reconciliation sections of the consolidated financial statements accompanying today's results.

As a reminder, on June 27 2019.

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It's like the give feels pretty good you know I think the.

We consistently I think said that we thought that.

The vast majority of the effects in Q1 would weather related.

And that once that weather issue.

Normalizing begin to see demand more in line with our expectations and I think that's what we.

Have seen.

So despite a number of kind of ups and downs that the macro level.

I would say that.

Particularly a recent east coast boat shows have been very strong we've seen significant improvements in retail activity over.

Last year so.

Phil on the ground seems good.

Momentum that we had in September seems to be.

Continuing.

So I feel like I'll read on the market was is pretty good and.

I get a good sense of dealer sentiment picking up as well.

That's helpful. Thanks, guys.

Thank you. Our next question comes from Steven Zaccone JPM. Your line is now.

Great. Good morning, guys. Thanks for taking my questions I just wanted to follow up on the previous comment about Mercury. So as we think about the fourth quarter should we be expecting propulsion sales to decline again, obviously will be less than the third quarter decline but.

Would you expect them to still be down and then just staying within.

Green engine.

On the peony side, it looks like on the organic basis. It was down for the second straight quarter.

So I understand the markets are volatile, but could you elaborate what's driving the recent peony weakness.

Maybe when you expect that to return to growth on an organic basis. Thanks, Okay.

Steve This is bill I would I would comment that you were.

Directional comments on Mercury sales in the fourth quarter correct, they will be down but not down to the same degree they were in Q3.

On the P. in a business you got to remember that there is 75% of that business, which is aftermarket which has continued to be stable and up.

Slightly the after the OEM side of that business, which is about the other 25%.

Is subjected to a lot of the production reductions were seeing across marine industry here in the second half. So theres nothing there the causes us any concern if it's behaving exactly the way we thought it would and.

Hey, good in the portfolio there is performing.

The way, we would expect it to perform.

Got it got it and then just more broadly on 2020.

Can you talk to your preliminary top line expectations for next year are you expecting both marine engine and the boat segment. You are correct returned to growth next year, maybe just what's the best way to add to rank the drivers that are going to drive the improvement topline. Thanks very much.

Steve I would say what we've talked about for 2020 is we're going to see.

Organic growth opportunities without any help from the market kind of in that call. It 60 cents per share range, plus or minus maybe 10 10 cents, it's really comprised of three things its.

Its growth and outboards as we bring new capacity online for the.

At 175 to 300 horsepower engine family.

We would expect to see more normal growth in the p. in a business.

As weather Normalizes next year, and we would expect to see.

Top in wholesale remember, we have been and growth in both we've been producing at wholesaling well below retail this year in a stable retail environment, we will naturally see a rebound in wholesale demand to match, what's going on at retail.

Those three things if you start to think about what the what the growth would be it's very close to that mid single digit.

Sort of number that we typically we'll talk about what our organic growth opportunity is and thats without any help from the market.

Yes, I think we're very very excited about the growth opportunities in all the elements of the business in 2020.

With a nice.

As we said even with a flat market, we'll get that growth.

Excited about what's happened in Q3 on the on the retail side and then what seems to be good good start to Q4.

We have not solve that much about new product launches either but I can tell you that 2020 is going to be one of the most exciting product use that we've ever had and the launches that you see a fort Lauderdale adjust the start of what you will see so.

The initial response, even to some of the products that we teeth already has been spectacular so I'm really excited about 21.

Great. Thanks for the detail.

Yes.

Thank you. Our next question comes from Eric Wold with B. Riley Your line is now.

Thanks, Good morning.

Two questions I guess first one.

Yes, as you noted that inventories down slightly needed to September can you talk about kind of level promotional activity that you kind of saw.

Needed to kind of move that inventory and then how would you characterize inventory in terms of maybe both type in age.

See.

As we as we said that.

We increased promotional activity in Q3.

But it was essentially in line with with the market I would say that will moderate in Q4.

So that was really.

Helpful. In Q3, two to to get things moving I would say a inventory levels versus the kind of baseline that we just set which is about what 30 were about 30 weeks mode right now as I looked across the all of the segments that were talking about modest modest differences within a couple of weeks, depending on which when you look.

But but all of the segments are coming down.

Inline with our expectations there isn't an anomaly somewhat I would say the only thing is we did.

As we mentioned we did pull down.

Boston whaler, particularly somewhat in excess of the.

While the average because of the new product launches that are imminent and will continue through the next 12 months.

Okay, and then just a quick follow up question.

Broader question, maybe one that kind of tough to answer but as you have conversations with your dealers.

Especially move into boat show season be seeing any any changes.

In purchasing behavior from both buyers, maybe things around financing needs and approvals price points are gravitating towards your time to make a purchase decision im going to point you there.

No I would say that we haven't seen any material change in financing I would say that we continue to see.

In the late in the.

Early or late season shield spending, which when you look at it the east coast shows.

We've seen particular strength in large sea ray and large Boston whaler.

I would say as you probably noted in the recent method aside though improvements were across the board, but I would say that.

Trending towards the more premium brands.

Perfect. Thank you yes.

Thank you. Our next question comes from Tim Conder with Wells Fargo Securities. Your line is now open.

Okay.

Thank you.

Just a couple of clarifications here and then one question.

The channel inventory clearance Bill can you give us any color on a year over year basis or absolute dollars. However, much the incentives are promos related to that in Q3.

Impacted margins and then.

Just to clarify a prior statement.

You're looking at for 2020 marine retail units to be flat in the us or goes that a global or yes, yes to that and then.

And then one.

Based question is related to the the ramp in the high horsepower outboards.

Yeah, I thought you guys might be shipping more in Q4, it sounds like that's potentially push back a little into 2020 or has there been any any shift in the timing of of that ramp or are those shipments or is that still as what you had originally planned all along thank you gentlemen.

Yeah, maybe I'll take the last one first them, it's Dave Yeah, there's been no change it's all the.

Ramp up in unit daily volumes has been ongoing and continues into.

Q4 as that additional capacity comes online so.

We are already going to start getting additional benefit in Q4, but the majority of it will come as we enter 2020.

Yes, Tim on if you look at year over year margin movements in boats in Q3 about a third of that was related to discount. So were down 240 basis points. It comprises about a third if you think about overall discount levels.

In the quarter.

Fairly small number compared to the overall sales volumes. So we're not talking to double digit millions number here, it's more of a single digit.

Millions number just to kind of put it into context.

And when you think about our assumption for next year 2020, I would say it are you triangulate to a flat unit flat dollar.

Sort of an assumption. So I think if you consider what we've seen in the market relative to ASP growth and things like that we're just assuming flat on both.

And I would say, where we're not at this point in time, making a market call. It is more of a without any help from the market. We feel that we've got a dollar per cent our dollar per share of growth opportunities. It helps us get us into that.

$5 to $5.50 per share range next year.

Thank you and our next question comes from Michael Swartz with Suntrust. Your line is now.

Hey, good morning, guys.

Just wanted to start off on on just the engine margins during the quarter I'm just trying to get a sense came in well ahead of what I was looking for but just trying to get a sense of how much of that is product mix towards the higher horsepower versus.

Aftermarket OEM versus some of the cost savings you've seen it if there's any easy way to bucket that I would appreciate it.

Yes, Michael I would I'll take that one I'd say in Q3.

We've got.

Favorable effects from mix, we've got favorable effects from operating expense benefits I'd say, the operating expense reductions in cost management activities or are greater than.

The mix headwinds, we're we're certainly operating at lower production levels and.

Tariffs in the quarter or not a bad guy a year ago, we were.

We were actually.

Incurring tariffs were recording expense for tariffs on the 40 to 60 horsepower engines, which were subsequently reversed in Q4 that actually ends up being a little bit of a headwind for us in Q4.

Okay, Great is sticking sticking with that tariffs I understanding that that wave three going to 30% in list for.

It wouldn't have much if any impact to 19, but is there a way to think about what the annualized impact of those two items would be as we as we think about 2020 with the maybe what the increment would be.

Yes, Michael its Ryan I'll take this one.

Yes, I mean, what we're looking at now is something very similar to the impact in 2018 could there be a bit of in a small increase depending on percentage of moving around depending on additional componentry coming in from China related to the 175 to 300 board.

Our.

Pass the.

Improvements, yes, I think you can see that.

But it would be a low to mid single digit million number. So we anticipate tariff impacts as we know them today to be roughly the same to this year with maybe a slight increase.

Okay. So the increase would be low to mid single digits not not correct. Okay. Okay. That's perfect.

All right great. Thank you guys.

Thank you. Our next question comes from Gerrick Johnson with BMO capital markets. Your line is now.

Good morning couple of questions first on outboards the decline in sub 150 horsepower is that purely market driven or perhaps are you, losing some share in that market.

No.

We are a I'll share continues to be very strong.

It really is related to.

The softness that we experienced and ponds in and fishing boat Illumina fishing boat sales in the first half of the year. We've been extremely strong line up 150 holes far below in addition to the substantially new lineup.

Which is above that horsepower range. So.

The other the other good news for US is I think as we free up the constraints on the new outboard family, which was 175 to 300 and not now includes the full 50.

Begin to use that to gain further market share we will pull along the rest of the product portfolio witness most most companies that we are.

Talking with already about.

Taking our engines wonderful portfolio not just the new engine. So really the we expect that capacity in the 175 to 300, not just to unlock marketshare opportunities in that range, but to unlock a full portfolio market share opportunities.

Excellent and then the inventory in field relatively flat, but.

How's the aging what does the average age of a unit out there compared to last year.

We track.

Really stuff, that's 12 months, an older and that's still in excellent shape.

On an historical basis, maybe elevated a little bit care, but still in.

Very excellent shape and we're also looking at the composition of 2019 model year product versus 2020, we made a lot of headway in Q3 rebalancing that to more aligned with where you would expect it at this point in time, it's still a little bit higher than it was but.

If you look at some of the historical activity there, we're still at very comfortable levels. So nothing that.

Creates any sort of material risk for us or gives us any concern looking forward.

Great. Thank you and David I have one more that I've had a lot of request for me to ask this one.

Last last quarter I asked you your confidence your 2020 guidance at ASCO of one to 10 I think you said 11 to 12, sorry to ask again, where it where are we on that scale right now.

What we're north of 11 to 12 Guy I would say that I'm very excited about the progress that we we've made setting out but 2020, both on the inventory side on some.

Tailwinds on.

Retail.

So very very confident let's say 15. This time I don't know, let me throw out a number there all right great. Thank you very much.

Thank you. Our next question comes from Joe Altobello with Raymond James Your line is now up.

Thanks, guys good morning.

It's going to go back inventory three second the expectation now is the end 2018 weeks on had flat to down slightly which implies a modestly more aggressive production.

When we were talking about three months ago. It sounds like you expect weeks on had remained about flat next year as well or at least that's what's baked into the five to 550.

Yes guidance and the reason I ask that is we've heard different thing from different manufacturers.

In recent weeks, but it sounds like you're not hearing any heightened conservatism among dealers or floor plan lenders at this point going into 2020.

There's certainly no.

Sort of conservatism being put on by the floor plan lenders I think specifically, we have been extremely proactive of managing inventories with our dealers to get them, where they where they want to be at the end of year.

So I'm very very comfortable were going to end the year and I think.

At the margin, we're not talking about significant.

Sort of adjustment in metrics at the end of the year, it's it's due to weak it's not.

Four five which would indicate a much more material shift in dealer sentiment I just think in advance of the boat shows.

Theres, probably some desire to see a bit more of the model year 19 product clear through the channel in advance of stocking product for 2020, and I don't expect that to be a big issue once the calendar turns into 22 point.

Okay. Thanks for that.

Helpful. And then just switching gears the capex. The outlook. This year is now 230 million I guess it was 40 to 60, what's the reason for the reduction and as we think about what a normalized level of maintenance Capex is that you guys, obviously, excluding the capacity investments.

What does that look like for 2020 and beyond.

So I would say the reduction has been a little bit of just reevaluating projects and timing, but a lot of its just payment timing.

When things get done when they get paid for is how it rolls through the cash flow statement. So this is not a material change in any of our capacity plans at mercury or any of our new product.

Development plan. So all of that stuff remains very much intact normal run rate, we typically talked about 3.5% to 4% of sales I think that puts us in a position where were both investing in product it fairly healthy levels and increasing capacity on a measured bases to meet what increased.

Demand is I think what you've seen happened. This year is a meaningful step up as we introduce new product and raised capacity beyond what we would normally do really pushed us into that.

$250 million range this year now to 30.

Is that the I just want to rainfall is that there is no no change to our plans for capacity expansion and we have not adjusted any of our product development plans.

Got it okay, but is that we have to 4% number a good number for 2020 or you think more 2021, you know thats a good number.

Okay, great. Thank you guys.

Thank you. Our next question comes from Scott Stember with CL King Your line is now.

Good morning, Thanks for taking my questions.

Good morning.

Could we talk about the on the Repower side I think you mentioned.

Some excellent growth or this last quarter and certainly the new family vendors is certainly helping there but can you maybe talk about the different parts of the world, where you're seeing the most growth.

The substantial portion of the repo market is in the is in the U.S. and really.

As we progressed cuddly unlock.

Additional capacity on the new engine family.

We have had pent up demand in our dealer channel to be able to.

Except new engines for Repower, and we're beginning failed to satisfy that.

Which had been a constraints.

Lastly, uneven even earlier this year so.

Repo market is particularly strong in the in the U.S. I would say.

Also in other areas.

You know dealers.

The them.

The channel to market in other areas.

Outside the U.S. as a little different too in the U.S. in the U.S. It is predominantly OEM.

Some repower.

In in Europe for example, almost all engines go through a dealer channel.

So it's a little different measurements outside but I would say no good growth in the U.S. as we've been able to free up more.

Got it and then lastly, you might have touched on this sort of that might have missed it but just for 2020 just.

Priorities for cash and I know you guys are completing here, we're getting close to completing your share repurchase.

Plan that you talked about before but how could we expect us to prioritize the buckets.

For 2020.

Well, we will obviously have continued.

Capital investments not quite at the level that we.

We were at this year.

We expect to complete our.

400 million commitment for share repurchases in 2019, however, we have authorization.

For another 200 million beyond that.

Good.

Should market conditions allow and then we have continued to mention that.

We will.

Continue to look at acquisitions.

Basically.

Parts and accessories and annuity related.

Businesses that fit more into all Phoenix portfolio, and maybe all service business.

Portfolio any other coming over the fits perfectly.

All right that's all I have thanks.

Thank you. Our next question comes from David Macgregor with Longbow Research. Your line is now up.

Yes. Good morning, Thanks for taking the question.

If you just talk about materials and component costs and the extent switch that provided any kind of benefit in the third quarter and just maybe your expectations for fourth quarter and I've got a quick follow up.

Hi, David.

Thanks, guys.

A commodity costs has been pretty under control we have seen.

You know very normal levels of.

Inflation, if you like on the cost side nothing extraordinary I wouldn't say they provided that a benefit I wouldn't say there were a headwind due to yeah. I would just say sequentially, we're starting to see year over year trends start to normalize a little bit I'd say, we went through a period for.

12 months, or so where we saw a bit more elevated inflation and then associated price increases as we get into the back half of the year here. Both of those are much more kind of inline with what historical trends would have been.

I would say just just connecting to a back to a question that Craig Kennison.

Earlier about.

The value of things like the aluminum both grew to a part of the value that is as.

Approaching a commodity suppliers as and component suppliers.

As a complete entity and making sure that we are realizing.

The economies of scale, we should be expecting considering the size of our buy so.

In addition to the product developments and SDMA reduction that that has afforded by the organizational changes that we made we will be using that to leverage.

Probably cost as well is there any way to think quantitatively about the benefit of that scale advantage.

Yeah, I think it's certainly.

We will begin to see the benefits of its next year.

We will become more pounds in the bottom line and then just my follow up I think we've been hi, Dave I think we took a pretty.

Direct with people that we have aspirations to get margin that business to be double double digit for diamond right. Certainly one of several levers that we have at our disposal to to contribute to that yeah. I can tell you. We are laser focused on that and and we are putting in place or actually executing on all the levers we need.

Okay, and just quick follow up I guess on this additional capacity in the engine business. So kind of exciting I guess in terms of what it could mean for growth, but I can you help us or just remind us in terms of just the extent to which is it will enable growth I mean, how much additional capacity are you putting in place and and.

Does it does it kind of cadence up over 2020 or is there kind of a step function increase in and then it's really up to you to sell that capacity going forward.

In the.

Let me see it in the.

New new family of engines that we introduce which is where the capacity is really mostly going and.

We have stated.

Roughly a 20% also increasing capacity available to us.

As we as we go into 2020.

I think our manufacturing operations those in Mercury does a wonderful job of teasing out every engine so.

I would expect them to see continued to optimize that new capacity over time, but it is it is a very material increase and certainly will unlock the opportunity for market share gains that are really been but just latent as weve as we've been.

Waiting for the past its come online.

Thank you and our next question comes from Joseph Spak with RBC. Your line is now open.

Thanks, just I guess a quick follow up on the last question, maybe you answered it but it does seem like on the boat side to the focus maybe is.

More on margin expansion disappoint, and I think you mentioned that sort of double digit target, but is that is that achievable.

Even if you know a relatively sort of flat outlook.

Over the mid term and and is and if so is that just from.

I guess, greater and greater efficiency and utilization in the plants or or or what sort of the driver of that.

Achievable with a slot market in the medium. So yes is the answer to that we have a number of things that that are going on including in the areas that you mentioned around operational.

Performance improvements.

The leverage that we have as I've mentioned in some.

Earlier calls in getting our manufacturing efficiency up to already demonstrated levels in Alabama plant is very very large.

Put on top of that.

The cost kind of cost reduction efforts that will begin to bear fruit strongly, particularly in 2020, but actually showing some benefit already.

And we have all 11, as we need to get to double digits.

And I may our product investments Joe are very much focused on places where we believe.

A lot of the significant profit opportunities or if you look at what we're doing it Boston whaler you look at what we're doing it sea Ray even brands like London, Harris, where we've got opportunities to it too.

Satisfy demand in premium markets.

All of that stuff should be very helpful to get to where our targets are.

Is there can you are you willing to indicate how many of the plants are sort of not at that best in class level.

I would say.

Say that we have.

Strongly demonstrated very high capability and several plans, but there are several others that have opportunity so I wouldn't be more specific than that.

Thank you at this time, we would like to turn the call Dave for some concluding remarks.

Well. Thank you very much for attending I am I'm very excited about the progress we made in third quarter of this year I think we demonstrated the ability to manage in different market conditions.

And we demonstrated the effectiveness of the actions that we've already taken and delivering I think really exciting level of earnings performance.

Against expected levels of revenue.

I think the is the tailwinds that we're seeing a in the latter half of Q3 and into Q4.

In combination with the progress that we've made on pipeline reduction both of which slightly better than we anticipated.

Sets us up very nicely and I am just I'm very very excited about the Fort Lauderdale boat show I Hope. Many of you will join is there I think it will be a great event demonstrating.

On all sides of our business the incredible power of our Oh Marine platform. So.

Exciting times ahead for us and thank you for a thank you for joining us.

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