Q4 2019 Earnings Call
All participants will be the 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 L. Marchetti Senior director Investor Relations.
[music] good morning, and thank you for joining us.
On the call. This morning, our day filed Brunswick CEO .
Bill Metzger, CFO and write Willem Vice President Finance and Treasurer.
Before we begin with our prepared remarks, I'd 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.
The details on the factors to consider please refer to our recent SEC filings and today's press release all of these documents are available on our website at Brunswick Dot com.
During our presentation, we'll 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 sections of the consolidated financial statements accompanying today's results.
[music].
As a reminder, on June 27th 2019, once we've completed the sale of its fitness business.
Starting with the second quarter of 2019 historical and future results of this business are now reported as discontinued operations.
Therefore for all periods presented in this release all figures and outlook statements incorporate this change and reflects continuing operations only unless otherwise noted.
I would now like to turn the call over to Dave.
Thanks, Al and good morning, everybody.
2019 was a very successful year for Brunswick, and our shareholders.
We delivered record earnings for the 10th consecutive year.
Substantially grew margins made significant additions to our product portfolio manufacturing capacity and technology platforms.
Fleeted meaningful cost reduction actions and have emerged as the world's premier recreational Marine company.
How solid fourth quarter performance reflects the continued successful execution of our marine strategy.
And reinforces the tremendous confidence we have in the future growth opportunities within each of our businesses.
The more favorable retail trends of the U.S. persisted in the quota that together with planned lower wholesale shipments activity resulted in us achieving our stated goals of lower field inventory than 2018, and relatively flat pipelines on a week's on hand basis.
Aside from a updated estimates on terrorists our views on our 2020 financial goals have not changed.
And I have a high degree of confidence that we will execute our strategy and deliver strong shareholder returns and 2020 .
We started the year off an exciting fashion with a spectacular debut at CES, a new product launches early boat shows and I look forward to leading Brunswick through further successes in our first full year as an integrated marine powerhouse.
I'll now provide some highlights on our segments on the overall marine market.
The Marine engine segment had tremendous success and 29 seen again posting record earnings and significant margin increases.
This was in the face of approximately 25 million of headwinds from unfavorable changes in foreign currency rates on tariffs.
Partially mitigated by a full year of solid performance by power products.
Demand for high horsepower outboard engines remains particularly strong, especially in the 175 to 300 horsepower categories introduced in 2018.
And the 400 of 500 horsepower engines released in 2019.
During the fourth quarter, we brought online additional capacity, allowing us to manufacture significantly more of these engines and 2020 .
With dealers and international channels already seeing some of the benefits in the fourth quarter.
We also continue to expand our outboard engine presence in salt water markets.
Industry, leading edge in lineup was on full display at the Fort Lauderdale boat show, where we again had a leading edge and share.
We plan to continue our success in Miami two weeks.
Finally in December we announced the formation of the advanced systems group.
Which is comprised of the power products brands on the Atwood group of businesses, which include Atwood whale garlic and most of guide.
Paul products continues to perform in line with our expectations and it's accretive to the overall growth in margins of the parts and accessories portfolio.
Brett <unk>, who joined US at the start of the year from Wolfe Wolfe will be leading A.S.G. I'm brings a great combination of talent and relevance experience to deliver future growth in these outstanding businesses.
In the boat segment revenue and earnings in 2019 were lower as anticipated we applied for a sizable improvement in 2020 due to our new products focus on operating efficiency at wholesale volume improvements enabled by the lowering of pipeline inventories in 20 nights.
Into appropriate levels.
Oh premium both brands, including Boston Whaler Sea Ray and Lund all performed strongly at retail in that keep product categories.
We also had strong wholesale sales growth with larger higher content product driving the improved sales.
As we discussed on recent calls Boston Whaler continues to have very strong retail momentum as we exit 29 scene.
However, wholesale sales in the second half of the faced challenging comparisons versus 2018.
In 2019, the business has been leaning pipelines in advance of new product introductions, and 2020 compared to strong pipeline increases in 2018 due to the introduction of new rail models.
As we enter 2020 with a substantial offering of new products, we anticipate a very strong retail and wholesale performance from this brand in the upcoming year.
The book business continues to focus on product leadership and expanding operating margins.
The cost reduction and organizational initiatives that we undertook in the back half of 29.
Our already driving efficiencies and allowing us to fully leverage our scale and drive operational excellence.
Sharing knowledge engineering capabilities of best practices across brands is enhancing our product and technology development and design excellence, while lowering related costs and accelerating time to market.
Lastly, Freedom book club celebrated the opening of its 200 franchise location early in the quarter.
On its way to a current total of 210 locations and continues to perform as anticipated.
Freedom was also named as a top 500 franchise with the top spot in the miscellaneous recreational business category by entrepreneur magazine.
Which is a further testament to the substantial opportunities associated with this business.
Yes.
Next I would like to review the year to date sales performance of us segments by region on a constant currency basis, excluding acquisitions.
In the U.S. total revenues were down 4%, while international sales in total were up 4%.
International sales for the engine segment increased by 6% with gains in all regions, except Canada.
The engine segment performance relates mostly to increased demand for hundred 775 to 300 horsepower engines.
Boat segment International sales were down 4%.
That's expected European sales continued to be lower due to slower market condition.
In the supply constraint caused by the transition from a contract manufacturing relationship that we noted that beginning of year.
This capacity is anticipated to be fully recovered as we exit 2020 as result of production expansion efforts that are manufacturing facility in Portugal with minimal investment.
Finally, Canadian boat revenue remained flat versus prior year.
This table provide some color on the performance of the U.S. marine retail market.
In the fourth quarter, which comprises only 10% of the total sales for the year retail trends continued to be slightly ahead of our expectations.
For the second half of 29 seen retail sales of outboard boats were up 3%, while the main powerboat segments were up 1%.
Outboard engine sales were up 1% for the year.
Pesticide data for the main powerboat segment was down 4% for you.
And then I'm, a outboard engine unit registrations up slightly year to date with Outboards 150 calls for an above up 9% for the year.
These results reflect the softness experienced in value pontoon alumina fish categories in the first half of the year.
Strengthen premium offerings, which is generating dollar growth that is out.
Facing unit performance.
We remain confident in the retail market environment as we move into 2020 .
Dealer sentiment is positive with well positioned pipeline inventories have been strong early season dealership traffic.
We believe that retail unit growth for both us and global markets will be flat to slightly positive in 2020 with outperformance of premium offerings again benefiting dollar growth.
29 theme was also a very significant year for capital strategy actions.
As anticipated we completed the remainder of all 400 million share repurchase commitments in the quarter.
Which together with the pushes the freedom book club in May fully deploys the proceeds from the sale.
In addition, we completed the exit of our defined benefit pension plans retired 300 million of near term debt to the retirements of our 2021 nodes and refinancing of acquisition related that.
Raise dividends and invested over 350 million in growth related R&D and capital expenditures.
Our yearend balance sheet position and cash flow generation capabilities continue to afford us the opportunity to deploy capital in a variety of ways depending on market conditions.
Including for acquisitions capacity enhancements debt reduction of further share repurchases.
Bill will speak more not specific plans for 2020 during his outlook second later on this call.
I'll now turn the call over to Bill for additional comments on our financial performance.
Yes.
Thanks, Dave.
For the full year net sales were up 1% versus 2018 with acquisitions, providing four points of growth.
Operating earnings on an as adjusted basis increased by 6% with solid margin expansion, a 50 basis points.
We finished the year with an adjusted EPS of $4 in 33 cents per share, which exceeded our most recent guidance.
This reflecting more favorable tax rate and strong execution by our businesses, particularly when we mercury.
As anticipated fourth quarter sales were down 4% with slight decreases in operating earnings and margin.
Operating de leverage reflects the timing of some tariff related activity in 2018, which why will address upcoming comments.
Yes.
In the Marine engine segment revenue was relatively consistent with Q4 2018 has continued robust demand for higher horsepower outboard engines, especially in dealer and international sales channels.
And gains in PMT sales.
Led by solid growth at power products.
Offset by anticipated softness in Alport engines, a 150 horsepower below and Sterndrive engines.
For the full year Mercury sales were up 3% with power products contributing 5% of growth.
[noise] Mercury's adjusted operating margins and operating earnings were also slightly lower in the quarter as comparisons between years run favorably influenced by the impact of a tariff exemption received in December 2018.
For the full year adjusted operating margins increased by a substantial hundred basis points outpacing our expectations.
This performance included contributions from power products, improving sales mix, an operating efficiency gains.
Which exceeded the impact of tariffs and unfavorable changes in foreign exchange rates.
In the boat segment adjusted revenues were lower by 15% in the fourth quarter as we completed our plant pipeline rebalancing efforts.
Full year sales were lower by 6% versus 2018 bore in line with our revised expectations from July .
By category in the quarter aluminum freshwater sales were down primarily due to planned reductions in value pontoons and aluminum fish products.
Recreational fiberglass remained essentially flat and salt water fishing performance was lower.
But in line with their expectations do the wholesale and pipeline dynamics, Dave described earlier.
Wholesale units sold in the fourth quarter were down 21% versus Q4 2018 late 13% decrease for the full year.
Average selling prices increased reflecting more favorable mix and expanded content on boats.
Margins for the fourth quarter and full year decrease versus prior year periods due to several factors, including pressure from the impact of lower volume and production rates plant inefficiencies due in part to new product Inder intra integrations higher retail discounts in previous quarters required a lower pipelines during the second.
Half of the year.
The impact of these factors exceeding benefits from cost reduction in operation Excellence initiatives, which will also contribute to margin growth in future years.
Right.
Pipelines are well positioned as we start the year and enter the boat show season dealer pipelines ended the year with 36.6 weeks of boats on hand measure a trailing 12 month basis, which is essentially in line with year end 2018 levels. However, on a unit basis field inventories down 7% versus the.
End of 2018.
In 2020, our plan assumes the pipelines will decrease slightly.
Our fourth quarter continuing operations GAAP results also reflect the impact of certain items that are excluded from our as adjusted results.
In operating earnings these include restructuring and impairment and other charges some quarter totaling $3.8 million, primarily related to our previously announced structural cost reductions taken across the enterprise.
In addition, we incurred seven and a half million dollars a purchase accounting amortization in connection with the power products and Freedom Bowl club acquisitions.
Finally, we recorded $4.9 million a charges related to the legacy sport yacht and yacht products.
Moving to 2020 in guidance for the year, we anticipate diluted EPS as adjusted of between $5 in 10 cents in $5.40 per share taking into account our view of the market our cost reduction efforts in 19 as well some of the more recent tariff developments, which I discussed.
On the next slide.
We believe that the four main EPS drivers that we have discussed in our last few calls, namely the impact from successful execution of our capital strategy additional 175, plus horsepower outboard engine capacity normal peonies seasonal demand in our diligent management.
Pipeline inventory levels, each remain intact and support our view on E S.
Our plan contemplates revenue growth of between six and 8%.
Operating margin improvements of between 40 and 60 basis points.
Continuing the favorable margin trends from recent years.
Operating expenses should decrease as a percentage of sales due in part to the full year impact of the cost measures taken in 2019.
We're also projecting low double digit percent growth and operating earnings and free cash flow in excess of $3 and 24 $325 million.
First quarter revenue growth of low single digits, well under index to the full year expectations. This is due mostly to the timing of wholesale shipments in 2019 and the significant reductions in the second half of the year.
S and the first quarter will increase by high single digit percent versus Q1, 2019, mostly due to benefits from 2019 share repurchases.
Moving to tariffs, we anticipate a net impact of 2020 pretax earnings of between 30 and $35 million or 10 to 15 million incremental to the 2019 impact.
The incremental impact is due solely to our wave one exception on the 40 to 60 horsepower engines not being extended into 2020.
As you likely know very few exceptions were extended.
We are highly disappointed in this outcome and would note that our non U.S. engine competitors import cost is not affected by these tariffs despite utilizing the very same Chinese supply chain for engine components.
Otherwise there are no changes to our tariff assumptions, we're anticipating wave one through three tiers staying at the 25% rate and that any way for tariffs will not have any material impact on our businesses.
We're not assuming any additional tariff exemptions being granted although we do have several wave three exception still under review by the U.S.T.R., which could total up to $5 million of in relief if fully granted.
On the boat side, the impact of retaliatory tariffs on boat exports. The you remains unchanged and incorporated into our plan.
We continue to proactively take actions to minimize the impact of tariffs on our businesses, which are included in our estimates and we are evaluating alternative manufacturing and supply chain strategies to further mitigate the impacts.
I will conclude with an update on certain items that will impact our PNM and cash flow for 2020.
We anticipating free cash flow for the year in excess of 325 million and our free cash flow conversion will approach, 80%, we expect to use between 30 and $50 million of cash for working capital for the year and occur between 120 and $130 million of depreciation and amortization.
Our effective tax rate is estimated to be between 20, 122% for the year and the cash tax rate is anticipated to be in the los low to mid teens percent range.
Finally, including the impact of a 400 million of share repurchase was completed in 19, along with planned repurchases and 2020 . Our average shares outstanding for 2020 will be approximately 70 to 79 and a half million shares.
We will execute our balanced capital strategy in 2020, leveraging our strong free cash flow generation, we plan to retire approximately $100 million over a long term our term loan obligations and expect to lower our debt to EBITDA ratio to less than one and a half times on a gross basis by the end of.
The year.
Our net interest expense is estimated to be about $65 million for the year.
We anticipate spending between 2200 and $220 million on capital expenditures throughout the year, including investments in new product with her engine DNA in premium both businesses cost reduction in automation projects and additional capacity in or propulsion business.
Finally, we plan to return to a systematic approach to share repurchases and our plan includes $100 million the repurchases in 2020 spread relatively evenly across the year.
We'll now turn the call back to Dave to continue our outlook comments.
Thanks Bill.
I'd like to provide some commentary on on you segment reporting, which we signaled on over the course of call.
During 2019 Brunswick implemented a series of strategic and organizational initiatives to sharpen the focus of the company on the recreational marine market and adjacent opportunities.
Stuff again 20 to 20, the company strategies and now focused on full business pillars propulsion parts and accessories.
And business acceleration.
As a result, the existing marine engine segment will now be broken into two segments beginning in the first quarter of 2020.
The propulsion segment, which will contain both outboard and sterndrive engine businesses belong with controls and rigging products, which it closely associated with our propulsion businesses.
And the PNM segment, which will contain all of the peony categories, including engine parts and consumables electrical products, both parts than systems and distribution business.
Concurrent with this change the company is also decided to change its measurement segment profit and loss due to a decision to streamline internal and external reporting practices related to marine engines sold from the propulsion segment to the boat segment.
This change in presentation, which is not the results of a change of business practice more closely follows current market dynamics and provides improved comparability with other book companies.
Consistent with past practice, we have provided select historical information, reflecting this new reporting structure in today's form 8-K.
We believe that these changes will allow investors to more fully evaluate the performance and value each business, especially the aftermarket focus PNM business, which contributes nearly half of the earnings of the cooperation.
Moving to our outlook by segments under the new structure.
Btwenty setting up to be a fantastic year for all about businesses.
For all propulsion segment, we anticipate net sales growth for the first for the year of between 6% to 8% with operating margins that a flat to up slightly versus 29 team.
We expect earnings growth, even with currency headwinds and the significant incremental tariff impact the bill discussed earlier.
Our top priority for this segment continues to be satisfying outboard engine demand and expanding market share, especially in the greater the 175 horsepower categories enabled by the added production capacity now online for high horsepower engines.
We also anticipate additional margin benefits as we satisfy greater levels of demand in the dealer Repower and international channels.
We remain focused on developing new platforms and technology for our engines unrelated control systems and our investing in a robust new product pipeline to enable topline earnings growth into the future.
Finally, we remain committed to delivering improved technology of performance in our Sterndrive inboard lineup of engines.
Although a much smaller component business versus a decade ago. These products civil loyal customer base and it remains our goal to retain our market leadership position in this category.
Yes.
Turning to our parts and accessories segment.
We anticipate organic net sales growth of between four and 6% accompanied by solid margin improvement.
As a reminder, operating margins in this segment would just shy of 20% 29 scene with more than 75% of segment revenues derived from the aftermarket.
If you include the controls and rigging business, which is now part of the propulsion segment operating margins were in the low 20% range consistent with what we've articulated in the past.
We will continue to concentrate our M&A efforts in this area as we have the ability to build out our technology stack and fell white space product areas through acquisitions.
Potential bolt on deals in this area, but generally in the 20 to 50 million range, which could be funded from free cash flow.
The growth of power products, which is now part of the advanced systems group as I discussed earlier continues to outpace the rest of up here in a business and should benefit from more normal aftermarket demand, an improved OEM outlook and 2020 , along with new products and other business opportunities.
I would group, which is the other portion of this he also plans to leverage new products and a streamlined operating model to increase margins and earnings this year.
We're very excited and confident in the outlook and growth opportunities for this business on the bretts leadership.
Finally, our boat business is keenly focused on improving operational performance on completing significant product launches and integrations and 2020 .
The combination of which should lead to topline growth of between six and 8% and strong improvement in operating earnings and margins.
Including the change in the reporting segments I discussed earlier, we anticipate exiting 2021 with double digit margins in this segment.
In Miami in a few weeks, we will give further information on how we can reach even more aggressive margin targets by the end of on you three year plan.
Our efforts in the back half of 29 seem to manage pipeline inventory levels put isn't a favorable position entering this year.
2020 wholesale sales expected to be to more closely match retail sales for the year, resulting in topline growth versus 2019.
Additionally, our structural cost reductions as well as the strategic actions within this segment that I referenced earlier in the call. We'll both provide benefits to our margin expansion plans and 2020 and beyond.
We will continue to expand freedom book club and execute against the strategic growth strategy.
We anticipate adding another 30 locations in 2020 .
Capitalizing on our synergy opportunities.
Notably the freedom fleet conversion to Brunswick boats on Mercury engines is ahead of plan and we anticipate strong sales into the franchisee base in 2020 .
Lastly, as shown in Fort Lauderdale, with the launch of the Boston Whaler 354, or five conquest models.
Yes, well, we debuted the sea Ray SL X all 400.
And then do you all the way left to 80 vantage launch our aggressive new product cadence is generating additional higher margin sales and capturing market share.
Although the integration of these new products will likely result in a slight operational headwind during the first half of the year.
These new products leverage technology capabilities from a cross integrated marine platform that enable users to more easily enjoy that day on the water.
Finally, as many of you know Brunswick exhibited for the first time at the consumer electronics show in 2020 .
Showcasing our technology on a global stage.
We not only launched a new sea Ray selects all 400 to be without unique fathom power management system.
But our team created a concept helm the illustrated what the future of boating could look like.
The exhibit was awarded an a plus grade and we engage with more than 40 potential partners that are interested in collaborating with us in areas such as artificial intelligence census, autonomy and more.
The traffic in our exhibit far exceeded our expectations and we counted anywhere between 30 and 60 people per minute taking pictures in our exhibit eight hours a day for four days.
We also gone at National media attention and still have more stories in the Q.
C. S. 2020 was so successful that we've already signed up to CES 2021.
In case, you wondering yes, we sold the boats on display it will be delivered after the Miami boat show.
Two people said that they wanted that exact boat and we have taken orders for several more just like it.
In closing we had record earnings in 2019 are proud of what we accomplished as a company.
But our focus is now to 2020 and beyond.
We will introduce an updated 2020 to 2020 twos Trustedid strategic plan at our Investor Day in Miami on Tuesday February 11.
And hope you will join us for this event.
2020 is our first full year of operations as an integrated marine enterprise.
We had the best recreational marine brands in the world. The most capable workforce and a streamlined strategy that has positioned us for success in any economic environments.
We plan on executing against our strategic plan delivering shareholder returns consistent with our long term goals.
We're confident that you will see the innovation and inspiration on the water isn't just a phrase but as the purpose that separates us from all of the company's enough space and drives us to deliver the best on water experiences for our customers, which in turn will create and sustain lasting value for all our stakeholders.
I'll now open the lines for questions.
Thank you to ask a question you would need to press star one on your telephone.
Withdraw your question press the pound key again to ask a question star one.
And our first question comes from James Hardiman.
Wed with Wedbush Your line is open.
Good morning, Thanks for taking my call. It was there was a strong finish to the IRSA figure I'd start with a with a nitpick here so.
Inventories three months ago, you said, you thought they'd be flat to down in terms of weeks on hand seems like the retail environment was.
I think better than expected. They finished up just a hair, what's the difference there and then as I think about competitive inventory levels I think.
Certainly the checks that we've done would suggest that you guys had been a lot more aggressive maybe than some of your peers and is there any concern that that could create sort of a heightened competitive environment here in 2020.
Hi, James.
Thanks for joining us.
Yeah I think.
It's not it's not possible for us to manage.
Inventories down to the nearest 0.1.
But I would tell you given the starts to the retail season in 2020.
Pleased that we finished slightly on the upside versus slightly on the downside because I think.
We I think the we have the potential risk of that's more of a risk of its not having enough than the rest of having too much right. Now. So I think we managed very diligently we manage units down very well managing exactly to the tenths of a week is probably.
You know that it's not something we can do but I think 12 intensive purposes, we finished.
As we planned.
And I have no problem with that very slight kind of half a week.
I think what we've seen more broadly across our competitors is.
Good behavior.
I think some started a little later than we did coming down so I don't see.
Broadly across the.
History that excess.
Inventory of competitors is going to be.
The hurdle for us going into the.
Okay and should I interpret the first answer is you feel a little bit better about where demand is likely to go. Then then maybe you did three months ago.
Yes, you should interpret it that way I think early season dealer traffic has been good.
Boat shows have been good.
So.
Well a sentiment is.
It's positive.
So I would say that.
The season is off to a good stuff for us.
And.
Yes, so that's a good interpretation I'm glad we are what we are.
Got it and then.
Thank you essentially answered this but.
The incremental tariff on the 40 to 60 horsepower outboards.
That request actually got denied or have you just not gotten any approval yet I guess I'm asking are there any chance that that could come back it sounds like the answer that question. It is no is that there's other way to think about.
Yes, so I think the process as it turns out.
It's different every time.
[music].
And.
When we first well granted the exemption.
The U.S.T. out was speaking with companies individually.
This time off this I think several hundred.
Pension requests only a handful were granted.
And the message that we got was that that was it. So I don't know if we actually finally got a company communication, but but the message that we have is that.
No further exemptions are on the table.
Thank you and our next question comes from Craig Kennison with Baird. Your line is open.
Good morning, Thanks, very much for taking my questions and congratulations on a big year last year.
I had a question and gross margin is there any way you can frame gross margin for both.
Propulsion and the PNM segment, I know, you're not going to give me a precise number but any light you can shed their would help us build their models.
You know, Craig, we really don't get to that level of specificity.
In anything that we report externally I think we do talk generally about kind of how things may index above or below.
The boat companies, where I think we've been pretty clear with people under indexed overall to accompany gross margins.
The propulsion business is more in line.
Maybe a bit more favorable that to company margins and then the p. in a business that the new P., an ace segment would over index to overall company margins.
Okay. Thanks, and then.
Dave a question for you I mean, there have been just so many changes here, including changes in the boat group and I'm just trying to maybe wrap my head around it but you've made changes to the aluminum boat group and then the technology Center I'm wondering if you can provide an anecdote or two that help illustrate what those changes.
Have created from a product standpoint.
Yes, Hi, Craig Thank you for joining us too.
I think.
The way to think about this is that.
We are.
Continuing to.
Build strong brand.
But its brand focus as opposed to individual businesses.
So we see a lot of benefits and consolidating some of that kind of backend operations. If you like of the.
Closely related businesses to leverage scale and increase the expertise available to all of our Brad.
So the the aluminum boat group, which is Lund low crestline a harris.
Lot of commonality around operations, a lot of needs to enhance digital marketing, which is not necessarily possible individual brand basis, but it's very possible on a collective basis.
So and then on the value fiberglass side, we formed eventually group to achieve something somewhat.
So this is really about making sure we have strong brands, but we leverage our scale and bring to bear the highest possible both level of expertise.
Through leveraged kind of backend operations, if you like so the.
The two brands that we have not done that fully on yet or don't intend to do a sea ray in whaler they have very strong.
Of individual operations, but we have put together the fiberglass Tech center, which is serving both of those brands and you will see.
Possibly already seen but certainly we'll see over the next year the rates at which that Tech center can push out new products for both of those brands on others is extremely high.
We have 106, the engineers and technicians in that group now that is more.
Horsepower than any other company can bring to bear in that kind of product line. So.
Think about it as maintaining strong brands leveraging infrastructure and proven capability.
And then sharing best practices.
Thank you and our next question comes from Michael Schwartz.
With Suntrust. Your line is open.
Hey, good morning, guys.
David I just wanted it what I wanted to talk about your commentary around the read your retail expectations for 2020, I think you've said flat to low single digit growth just I guess a point of clarification is that global growth or U.S. growth and then how to think about the cadence of retail.
Through 2020.
Yes.
Yeah, that's a global it's a global view.
So I think you know typically the U.S. over indexes.
You asked will.
Europe will probably under index, a bit, but but it's broadly.
Global.
In terms of.
Cadence I guess versus last year.
We were we were at this point in the years still.
Anticipating a stronger first half the year them than we actually achieve so.
We were still building wholesale.
And the retail activity, obviously didn't emerged quite as we expected it to do.
So I think this year it'll be a much more balance here, we go in with low of pipelines.
So I think will better match wholesale and retail throughout the year. This year, obviously, we'll still be building.
Inventory in the first part of the year to to serve the.
The the demands of the peak season, but I expect expect just an overall more balanced.
Wholesale and retail across all forces.
Just to.
I think Michael the only thing I'd add to that is that I think we're kind of expecting or anticipating more normal seasonality.
2019, probably didnt have exhibit kind of normal seasonality it was a bit more back end loaded.
Then front end loaded on the retail side wholesale was exactly.
The opposite more front end loaded and back end loaded. So I think as you look at wholesale comparisons 19 to 20, the comps get to be a little bit more challenging the first step back half obviously much more favorable on the retail side.
The performance in the back after the year was little before the front half of 19, a bit more challenged we'd expect maybe the comps to be a little bit more favorable in the first half of the year.
Okay, Great and that's that's very helpful.
And then just maybe I think if youve given us the total tariff impact Q expect for 2020, and then incremental versus 19.
I guess, how much of that increase was due solely to not getting the exemptions on the smaller horsepower engine.
18, I think the number with some kind of in the high teen millions.
Does that impact is that still the way to think about it from just that piece.
No Mike This is Ryan.
The the way to think of it is 10 10 to 15 million incremental for the year. It is all related to the 40 to 60 horsepower exemption not being renewed there's a little difference in volume, there's a little bit of difference and how many engines. We had on the way over here in inventory position. So you know it's within.
A margin of error, but 10 tend to fifteens, the best way to think of it.
Okay, Great Great and then David I think in your closing comments you had mentioned on the on the boat group.
Do you think you can get the margins back the double digits, but 2021, I guess I caught me a little off guard Tribby and I'm sure, we'll get more color in Miami, but maybe give us a sense if some of them. The larger levers you can pull getting there because I think the guidance for this year implies 8.5%. So it now present, plus so that seems like a pretty big.
Yes.
Yes so.
I think we've articulated.
The kind of things that we're doing in the book group around a couple of areas one is.
As I referenced with Craig earlier, we have significantly leaned out the book group.
Organization, including the management structure, so SDMA levels will be significantly lower.
Especially as we get into this year and beyond them. When we see a full year effect of the actions that we took in the back half of 29.
And then we have a lot going on operational excellence and supply chain management that we will.
Reap significant benefits from it.
In in this year and next year as well and that is those are progressive benefits that will.
Build over time, if you like.
We also.
Have some additional capacity in place that allows us to build more of that.
Hi, a consent large both products that is but it's helpful to margins for us and of course.
Yeah, just in the last three months Boston whaler.
Which was leaning out its pipelines ahead of product introductions has already introduced three brand new models and that is just the stopped floor.
Whaler and there's more to come from our other brands as well so I think a lot of efficiency in.
Operating model S. DNA in al plants in our supply chain and then some very nice new product coming through as well.
Thank you and our next question comes from Steven Zaccone with JP Morgan Your line is open.
Good morning, guys. Thanks for taking my question.
During the first question just on marine industry. Following up on the first question today, where do we stand on the health of channel inventories when the segment value versus premium or may be salt water markets versus freshwater market.
You know all markets pretty pretty stable are there some areas or maybe a inventory is still on the high.
I think that.
I think we've done a pretty good job of bringing inventory down in all segments I think I I mentioned on the last call that.
What weve been trying to achieve is not just in aggregate.
Number it is up by segment number as far as we possibly can making sure that our inventories are in line with.
Anticipated needs for foot 2020.
I would say that.
The sell through of premium products.
At the back half a 2019.
In retail was probably a little higher than than we anticipated and.
In sum.
Earnings calls earlier, you probably heard a little bit more about that but so I would say that we.
Below average on premium product, particularly whaler.
But really we're not a bad shape anyway.
Great. Thanks, and then just fee.
Second question, we're just talking through the topline expectations for the boat segment 30 year, you know any help around thinking about performance by specific category and then one clarification within that segment, how much revenue should we be expecting from the business acceleration division just trying to figure out what the organic growth rate is.
Segment person to be.
The guidance text, 8%, thanks very much.
Okay.
So.
I.
They'll do you announced last week.
Right I think it's going to be pretty similar to what it was this year, which has a couple points. Yes, that's exactly right a couple of points for free this for your freedom of freedom.
Revenue acceleration for the for the vote group by segment.
I think you know, where we'll be will be particularly strong for us, but all other premium brands. We're anticipating good good you as far as well.
So you know we're expecting everybody to contribute here, we we see the realignment of wholesale and retail given our.
The wholesale was so far behind retail in the back of.
On the back of the 2019 I think allows.
A lot of options for and lot of possibilities across all brands, but I would say the premium brands again will be particularly strong.
Thank you and our next question comes from Tim Conder with Wells Fargo. Your line is open.
Thank you then gentlemen, congrats on ramping a strong year.
Just a couple here if I may.
The freedom, though club how you commented that the adoption of Brunswick products is maybe trending a little bit ahead of your expectations and I think he said also 210 locations or franchises by the end of 2020 from the current 200.
So what do you have built into that 6% to 8% growth that will be due to the can the conversion or picking up a brunswick products by those locations.
So yeah Tim.
Good morning to you. So we just achieved 210 locations, we're expecting probably another 30.
This year, so we'll be up in the 230 to 40 range by the end of year.
Yeah. The conversion rates, we've been very very pleased engaging with our franchisees on the very compelling product and service offerings. So we can provide and on the uptake of both of both products and our engine products has been very very strong. So that's really good.
As we mentioned earlier the fleet size of freedom is roughly in the two and a half thousand range. It turns over every.
Kind of two to three years so.
No you can expect.
Roughly 800, new boats into the.
It's the franchise every year and we're expecting too.
Become a significant portion of that.
The rate that will accelerate.
We will be will be accelerating more strongly in probably 20 back half of this year in 2021.
But we will make good progress already in 2020, I'm not going to give you an exact number here but will.
We will make strong progress and penetrating that.
800.
This year, both on the boat side and more on the engine side.
Okay. Okay no helpful. David Thank you.
And then gentlemen, how would you frame I mean, you narrowed and you're you're the range your guidance kept your midpoint to same despite the.
Incremental tariffs being folded in there, but how would you frame at this point.
The upside downside scenarios, let's just say at the marine industry globally is down five or plus five versus you know you kind of seen globally flat, maybe slightly up what if we if we hit that down five plus type or is that 510 540 still achievable.
Or whether it would we fall outside of that range under under the down 5.5 scenario.
Yes, so yes Im sorry, you know we as we as we set out guidance. We go through a list of risks and ops for the year and we we make than assessment I think what we have in place here is a very balanced assessment.
That includes considerations the potential downsides of potential upsides to the market and various other factors. So.
I would say that we are guidance is robust and.
And we've considered various scenarios, obviously not extreme scenarios, but certainly.
You know plausible scenario is on the up a downside.
I think kind of depends Tim of what other things accompany a.
Market adjustment and how much of our portfolios adjusted I think.
We consider some of the opportunities on the premium both side high horsepower engines and things like that not to be.
Potentially is variable is the overall market might be.
If 5% market difference in kind of the value in similar to what we experienced this year our ability to manage the cost structure and things like that I think is.
Pretty reasonable and you could stay within that.
510 area in that sort of scenario, but.
Things like currency and tariffs and other parts of the markets start to get influence it gets to be a little bit more difficult, but I think in general when we set a bottom end of a guidance range.
We generally have try to understand what sort of things do we need to compensate for and we feel pretty comfortable that we've got a pretty balanced view of that given what we know today.
Okay gentlemen, thank you I remember yeah, Tim remember also that when we went back to the dollar that took you from the for 25 midpoint to the 525 midpoint about 40 cents to that was capital strategy, which is relatively already completed due to the share repurchases last year, So there's a little bit.
More you know, there's a little bit more certainty on that piece because it relies on.
Actions that have already been taken.
Okay. Okay. Thanks, gentlemen, seen a few weeks.
Yes. Thanks.
Thank you. Our next question comes from Eric Wold with B. Riley Your line is open.
Thank you good morning, guys.
Couple of questions I guess, one follow up on on the last one around the guidance for 2020 times. He kept the the midpoint of the range and change with the incremental terrorists being in there I guess.
What was the main factor that are factored. It allows you can absorb that incremental 10 to 15. So obviously now you're giving some better outlook on the sales side is the sales growth a little bit more robust Jimmy would have thought given given what you've done under a pipeline et cetera and work on maybe what's what were the factors are going to get that that that you've got to.
Changed.
Well I think.
Certainly that was the.
Unexpected tariff headwind, but it but if you think about the back half of the.
Lot of things are going very positively and providing a tailwind.
I think.
When we when we talk to the kind of analyst investment community about the.
Manufacturing expansions that we would do.
Victory in the extent to them there was some nervousness about that but in fact, they went without a hitch.
So we we added that additional capacity with no issues, we saw retail.
Tick up in the back half of the year, which was positive for us.
When we when we started to get that manufacturing capacity in place.
We also sought it to see.
Clearly the margin benefits and mercury from being able to serves the.
Some of the higher margin customers.
So that that is a validation of part of our strategy.
And then launch of the new both products has also gone flawlessly and on the reception has been absolutely wonderful so.
We saw this unexpected headwind, but but overall if you think about what I've just described plus a pretty decent start to the year. This year I think.
We are pretty good shape to.
Offset that.
Preventing just follow going on that on the engine capacity.
In the in the Capex plan for this year.
You know, possibly additional expansion going to what was added in the fourth quarter around engines.
Fully in place or that need to going to ramp a little bit in 2028, and what else could you add.
This year.
No. It's fully it's fully executed was fully executed in the back half of 2019 so.
We are able to take full advantage as we enter 2020 and that as we have into 2020.
Certainly that you know all Mercury's always looking at it make any separations more efficient and if we need to add more capacity, we certainly will but.
But I think we are in very good shape as we enter the season.
The service all of our customers right now and to go after.
The conquest opportunities that really been.
In reach but we couldn't quite get to them because of capacity. So I think the whole Mercury team is very very excited about having that capacity beyond that to go after those additional opportunities.
Thank you and our next question comes from Mccarrick Johnson with BMO capital. Your line is open.
Hey, good morning.
On the new segment reporting reallocation of operating profit two boats from engines can you talk little bit more specifically about that and what is actually causing that.
Yes, garik thanks for question.
We.
You know the process that we're following here, we've decided to make an adjustment to the measure segment profitability.
I'd say, what we're doing now is very consistent with kind of an ex internal reporting methodology that we've followed for quite quite a while or had in place for quite awhile.
That we think better reflects market dynamics and compare ability to external comps.
Yes, I think it's important to note that it's not the result of a change in business practice I think if you look at what's implied on intercompany sales that amount is unchanged.
We have had kind of a parallel methodology internally that we views the externally that kind of reflects business practices that date date back to over a decade ago.
We are you know.
Which maintain consistency with historical practices, but as we sit here today.
We've made a decision to streamline and follow kind of what I would consider to be more.
Current and relevant.
Kind of economics between the boat and they are between the engine in both segments.
And.
The new segment change was an ideal time to do that.
Okay.
I think I still understand but we can we can take.
I'll find later.
Moving on.
Your realignment actions announced last year in June or July you said, you get about $50 million, an annual run rate savings.
Still expecting that 50 million and is all that being realized in 2020.
And how do we face towards that through the year.
Yes, so the the structural actions that we took in 2019, we expect the full benefit of in 2020.
You will note I think that.
We noted operating expenses down as a percent of sales.
This year.
Yes, this last year.
That is despite the fact that.
We have a full year of.
Freedom Ballclub.
<unk> expenses, despite the fact that we have.
Put the full.
Variable compensation.
Provision back in and despite inflation, so yes, the structural cost reductions of 50 million of firmly holding.
Thank you at this time, we would like to turn the call back today for some concluding remarks.
Well. Thank you very very much for joining us today, we very pleased about 29 scene.
No not only for the financial results, but also because it was a transformational year for us.
We're delighted with the ways that the company is operating we're delighted with the foundation that we put in place.
Both physically.
Through product and technology and capacity.
But also viral capital strategy so.
I answered 2020 with tremendous expectations for our business, we are built to win.
Right now and it's going to be very exciting year for us I cannot wait to share our.
2020 to 2022.
Three years strategy with you guys in Miami I think you will be justice excited as we are so.
I can't wait to see in two weeks time.
Ladies and gentlemen. This concludes today's conference call. Thank you for participating you may now disconnect everyone have a great day.
[music].