Q3 2020 Brunswick Corp Earnings Call

[music].

All participants will be in 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 Chris Decker, Vice President General Counsel and corporate Secretary.

Good morning, and thank you for joining US with me on the call. This morning are de Falco Brunswick, CEO and Ryan well CFO before.

Before we begin with our prepared remarks, I would like to remind everyone that during this call are comment our comments will include certain forward looking statements about future results. Please.

Please keep in mind that our actual results could differ materially from these expectations.

For 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 will be referring to certain non-GAAP financial information reconciliations of GAAP to non-GAAP financial measures are provided in the appendix to this presentation and the reconciliation sections of the consolidated financial statements accompanying today's results I will now turn the call over to Dave.

Thanks, Chris and good morning, everyone.

Each of our businesses delivered outstanding operating results in the third quarter.

Our ability to capitalize on very robust retail demand, which was enhanced by expanded boating participation and all compelling portfolio of industry, leading brands drove excellent financial performance and value for our shareholders.

[noise] Powerball me Marine platform and our investments in operational excellence run full display as we accelerate the production levels to both meet retail demand, which continues to be elevated even as we exit the primary selling season in the U.S.

And begin the process of replenishing historically low pipeline inventory levels.

Oh extraordinarily strong free cash flow generation provides us with the flexibility to execute our capital Scott strategy, which amongst other things the composition.

Our planned investments in growth initiatives, including new products advancing our aces strategy and maximizing the reach of Freedom book Club.

Oh propulsion business continues to gain appreciable retail market share, particularly in high horsepower categories as a direct result of our product leadership efforts and.

And as yielded many new OEM customers, a new dealer relationships throughout the year.

Oh parts and accessories business delivered significant topline and earnings growth.

Has increased boating participation and favorable weather, which extended the boating season in the U.S. drove strong aftermarket sales well.

While OEM production ramp ups across the industry also created high demand for our full range of OEM systems and services.

Oh premium boat brands remain market leaders in their categories and I'll tell you brands offered attractive entry points to new and returning form of voters.

The surge in retail demand resulted in historically low pipeline inventory levels with only 14 weeks of inventory on hand of 48% fewer boats in dealer inventory at the end of the third quarter 2020.

This is the end of the third quarter 2019.

As a result, most of our brands of all production slots sold through the 2021 multiyear Sea Ray and Boston Whaler brand stopped production slots sold out into the 2022 multiyear.

Finally Freedom book club continues to outperform our expectations.

As evidenced by its growth to 244 locations and.

An almost 36500 memberships companywide with over 3000, new memberships added in the third quarter alone.

Finally, although we continue to operate in an uncertain environment, our enhanced visibility into the outlook for our businesses enables us to provide guidance for the remainder of Twentytwenty as well as 2021, which Ryan and I will speak to in a few minutes.

Well, it's a continued to outperform the industry and attracting new and more diverse boxes, which is positioning us very strongly for continued growth.

Similar to our commentary in the second quarter call more than half of the sales of Brunswick boats in the period from June through August was the first time buyers or returning lapse boats as well.

With the average age of Brunswick, both buyers being the youngest since 2011 and younger than the overall industry.

Freedom Book club membership trends towards an even younger demographic, where the average freedom member being three years younger than the average owner Brunswick boat.

The freedom operating model allows younger boaters to get on the water frequently with high quality products prepared and ready to go for it they would finally on friends.

Boating participation has also been more diverse throughout 2020.

Over the last several months the percentage of women buying votes as equals the highest on record while the percentage of new female boats is Reid of female members of freedom is double the percentage of women registering you both.

More recently in August we saw an uptick in Hispanic and Asian buyers of Brunswick products and an increase in Hispanic membership of freedom.

It is critical to the success of Brunswick in our industry, we continue to drive more diverse boating participation.

Find ways to engage with non traditional boats is through new products and participation models and advances in our digital capabilities.

I'll now provide some highlights on our segments on the overall marine market.

Oh propulsion business continues to outperform the market due to the strength of our industry leading product lineup.

Hi point inventory of Mercury outboard engines is significantly lower than in past years, and we continue to successfully ramp production to refill pipelines and meet exceptionally strong customer demand.

Mercury continues to gain significant retail market share in outboard engines, especially in high horsepower categories. While we have focused high levels of investment in recent years.

As a result of all constant product innovation and the ability to quickly ramp production as a result of the capacity increases in 2018 and 19.

We continued to successfully execute its strategy to win new we have new OEM customers.

A new relationship with sportsmen and an expanded relationship with Bennett. So the largest boat manufacture outside the U.S. were announced in just the last two months thereafter.

There are many more new and enhanced partnerships in process.

Mercury's that standing products expanded capacity and excellent operational performance have also led to new dealer wins with 60, new Repower dealers added so far in Twentytwenty, resulting in an improved sales mix.

Finally, the additional capacity has allowed us to serve more international customers, where our high horsepower commercial derivatives continued to take market share.

Mercury's aggressive new product development cadence remains on track with an all new forward facing wake Sports drive launched in August and significant additional new product launches coming in the next six months.

From DNA segment third quarter results were bolstered by very healthy boat usage.

Favorable weather continued into the fall for many regions of the us.

Our distribution business, which saw revenue growth of more than 30% visit 29 team was able to capitalize on increased participation an extended season in both the marine and RV spaces.

Okay and champion a business also enjoyed a strong quarter supplying products lot dealers to support increased service needs.

The list of commented that they have for six or even eight weeks behind on servicing which should continue to generate sales into the traditional off season.

The OEM portion of the PNM business also had a strong quarter as boat manufacturer is ramped up production to satisfy demand and rebuild pipelines.

The advanced systems group, which includes our power products and what businesses demonstrated significant year over year sales and earnings improvements leveraging the same aftermarket and OEM trends.

Including ASG LP in a business represented almost 40% of the company sales in the quarter and over half of the operating earnings.

With margins continuing to expand the steady annuity based business strengthens our overall financial profile and provides a robust baseline earnings from which we can continuously invest in our businesses and return capital to shareholders.

Our boat business had a fantastic quarter with topline earnings and margin improvements across the lineup.

Weve adjusting operating adjusted operating leverage of over 35% the operating performance of the business in the presence of strong wholesale demand, but also the challenge of rapidly ramping up production creates confidence that this business will achieve its strategic goals.

Pipeline inventory levels, a key driver of future wholesale both sales ended the quarter at approximately 14 weeks the lowest level at the end of the third quarter for the last two decades.

Boston Whaler and sea Ray has seen very strong retail sales and that dealer inventories are especially low.

Our value brands have also performed well at retail and we'll also requires significant pipeline replenishment.

We continue to hire additional work is that most facilities to ramp up production, but it is very unlikely the pipelines will be fully rebuilt in 2021.

Freedom boat club continues to exceed our growth expectations with memberships, increasing 61% since we acquired the business last may.

In addition sales of Brunswick product into the franchise network are exceeding expectations with over 800 boats either purchased or on order since acquisition.

Each rig with the Mercury engine and equipped with LPTA products.

Just recently freedom was named entrepreneur magazine's top.

Franchises list.

Which recognizes the 150 companies with the greatest positive franchise unit growth in North America over a three year period.

Just a few weeks ago, the NHL Stanley Cup Champions Tampa Bay Lightning held that championship rate on the water in Tampa using 20 boats for Freedom book Club.

Making national headlines for one of the most unique championship celebrations in history.

Finally, our investments and accelerating and improving our digital assets and capabilities continue to bear fruit as many inputs industry shows a scaled down or cancelled you to cope with 19.

Mornings announcement regarding the cancellation of the Miami International boat show along with many other early season 2021 shows was anticipated and does not influence our wholesale and retail demand projections.

Our digital and E Commerce technology is enabling us to reach and engage with a wider audience of potential new boaters dealers another customer.

In addition to launching new products online.

A recent virtual trade show held by our licensee distribution business generated 16% highest sales than the equivalent physical show last year.

Next I'd like to review sales performance of our business by region on a constant currency basis.

Third quarter sales increased versus 2019 in all regions and across most businesses.

And the U.S. total revenues were 27% higher while international sales were up 24%.

Asia continues to experience robust demand for higher horsepower outboards, mainly for commercial purposes and that M&A sales.

Other regions of the world, including Europe, and Canada reversed the challenges of the previous quarter reported strong year over year growth.

International sales are up 5% year to date led by gains in the propulsion business in most regions.

This table provide some color on the performance of the U.S. marine retail market.

The first three quarters represent approximately 90% of total sales volume for the year and it's becoming a very strong year as most of you know.

Although categories reported retail gains in the third quarter and positive growth for the year.

The main powerboat segments were up 39 cents in the third quarter are up over 8% year to date with Brunswick's retail performance exceeding the market.

Outboard engine unit registrations were up 34% in the quarter with Mercury significantly outperforming the market as they have done for all 2020.

Mercury gain retail share in the third quarter and just about every horse power node with outsized increases in large outboard engines over 200 horsepower.

Closing out the year, we anticipate fourth quarter retail to continue in growth mode as lead generation finance applications dealer sentiment and other leading indicators are all very positive.

All these factors give us confidence in the retail market as we move into 2021.

I'll now turn the call over to Ryan for additional comments on our financial performance.

Thanks, Dave and good morning, everyone.

Robust retail demand together with late strong late season boat usage had a material impact on our financial results in the quarter, making for significantly better year over year comparisons.

Net sales in the quarter were up 26%, while operating earnings on an as adjusted basis increased by 49%.

Adjusted operating margins were 16.5% up 260 basis points versus third quarter 2019, and we finished the quarter with an adjusted EPS of $1.80 up 64% from prior year.

We generated $396 million of free cash flow in the quarter.

Outstanding outcome was driven by strong earnings and favorable changes in working capital, resulting from reductions in inventory and increases in accounts payable from increased production as well as a seasonal reduction in accounts receivable.

On a year to date basis net sales were flat versus 2018, and adjusted operating earnings were down 2%.

Adjusted operating margins of 13.6%, which are just 20 basis points lower than the same period in 2019.

As a very good result, considering the challenges faced by the businesses in the first half of the year with having to shut down then ramp up production as a result of the pandemic.

I will now discuss our third quarter performance on a segment level.

Starting with the propulsion segment revenue increased 33% as each product category experienced strong demand, especially in higher horsepower outboard engine categories and related controls and systems.

All customer channels showed growth in the quarter as OEM customers continue to ramp up production and increased capacity enabled elevated sales to the dealer and international channels.

Operating margin and operating earnings were up significantly in the quarter as a result of increased sales and favorable changes in sales mix, partially offset by the unfavorable impact of higher variable compensation costs.

In our parts and accessory segment revenues increased 23% and operating earnings were up 29% versus third quarter 2018, due to strong sales growth across all product categories.

Adjusted operating margins of 23.4% were 100 basis points better than the prior year quarter with year to date margins now 20 basis points better than year to date 2019, showing a consistent sustainable earnings power of this business.

Revenues in the boat segment were higher by 18%, resulting from significantly higher wholesale sales to dealers both to meet increased customer demand at the retail Paul as well as to begin refilling pipeline inventories.

All of our boat brands steadily ramped up production in the third quarter to meet the strong demand.

Boston Whaler and sea Ray continue to outperform their categories Lund remains the leader in premium and aluminum fish boats and our value brands also showed healthy retail demand.

Increased production and sales resulted in healthy operating leverage of 35% during the third quarter driving operating margins to 9.2%.

A 470 basis point increase compared to the third quarter of 2019.

All product categories contributed to margin growth with Boston whaler low end and the venture boat group, which includes Bayliner and heyday, all exceeding 10% margins for the quarter.

As we've been discussing as a result, the surge in retail demand detect dealer pipeline ended the quarter at historically low levels, our lowest pipeline inventory levels in over 20 years.

Our boat brands ended the third quarter with 14 weeks of boats on hand measured on a trailing 12 month basis.

With units in the field lower by 48%.

Our pipeline projections for year end assumed a dealer inventories will increase through the fourth quarter to approximately 22 weeks on hand.

But that will still be approximately 13 weeks behind typical year end levels.

To help put this into perspective, we are currently estimating that we will wholesale in 2020 between 28 and 29000 Boes, while retailing between 36 and 37000 Bucks.

Even if we assume a flat retail environment next year, we will need to manufacture and wholesale seven to 9000 more boats in 2021, just to satisfy retail demand without building dealer pipeline inventories.

We believe our current manufacturing footprint will support this increase and we continue to work with our brands to unlock even additional capacity.

The resulting pipeline inventory levels and still be below desired levels by the end of 2021, but this would position us for strong wholesale sales again during 2020 two.

While we remain very cognizant of macroeconomic headwinds and other uncertainties. Our continued strong performance in a robust marine retail environment have created improved visibility into our substantial growth opportunities for the remainder of 2020 and 2021.

Despite the potential impact of the pandemic on our global labor availability and supply chain elevated production levels over time will be required to rebuild boat and engine pipelines and together with significant upcoming product new product offerings should drive wholesale growth into next year and below and beyond.

As a result, we are providing the following guidance for the remainder of 2020.

We anticipate that U.S. marine industry retail unit demand will be up high single digit percent for the year was slightly stronger demand in the U.S. and in international regions.

We expect fourth quarter revenue to increase low to mid teens percent over Q4 2019.

With adjusted operating leverage in the high teens percent.

Lastly, we believe these inputs will drive full year adjusted diluted EPS of approximately $4.75 with frequent flat free cash flow generation in excess of $600 million.

These 2020 expectations and the initial thoughts on 2021 that Dave will discuss shortly I assume no additional major pandemic related business continuity issues.

In addition, as we have cautioned in the past quarters it cannot be overstated that the level of recovery of the global economy continued stable channel operations.

Ability to moderate labor and input costs and the absence of significant additional disruption to our global operations and supply chain will all be important factors in determining whether we ultimately perform in line with our targets.

Our current liquidity position is very strong our liquidity planning is influenced by several factors, including our cash position our ability to generate free cash flow and retain full access to our revolving credit facility as well as our plans around debt repayment share repurchases and dividends.

We anticipate generating free cash flow for the year in excess of $600 million and we plan to have total liquidity of more than $970 million by year end.

We ended Q3 with cash balances totaling $660 million versus $332 million at year end.

This increase included free cash flow generation of 520 million in the first nine months of Twentytwenty or approximately $441 billion more than the same period in 2019.

Principally related to favorable changes in working capital driven mainly by reductions in inventory.

The significant free cash flow generation in the third quarter allowed the company to repay the remaining $185 million of borrowings under its revolving credit facility and further reduce our long term debt obligations by $39 million as planned.

I will conclude with an update on certain items that will impact our PNM and cash flow for the remainder of the year.

Aside from the updated anticipated free cash flow just discussed most of these estimates.

Changed only slightly since the July call.

The one exception remains working capital, where we now estimate a reduction in excess of $175 million for the year.

Given the demand and production dynamics, we've discussed inventory levels are down significantly through the first nine months of the year and although we do anticipate building inventory in the fourth quarter in our propulsion MPN eight segments, we had dissipate ending the year with reduced working capital.

We anticipate between 115 and $120 million of depreciation and amortization.

Our effective tax rate is estimated to be between 21% to 22% for the year when a cash tax rate anticipated to be in the low double digit percent.

Our average shares outstanding figure remains at approximately 80 million shares.

Also as a result of the strong cash flow generation, we've made some more significant changes to our capital strategy assumptions, reflecting actions, we plan to take in the fourth quarter.

We are now anticipating that we will use an additional $60 million of our considerable free cash flow to continue paying down our 2023 term loan, resulting in total debt retirement of $160 million for the year.

This incremental repayment would lower our debt to EBITDA leverage below one and a half times on a gross basis by the end of the year.

In September we also announced that we were restarting our systematic share repurchase program with a goal of repurchasing $100 million of shares in 2020, which is consistent with our target to start the year.

We completed $45 million of repurchases in the third quarter, leaving us with $21 million than planned repurchases in the fourth quarter.

Finally as discussed last week, we have increased our quarterly dividend by 12.5% to 27 cents per share, which represents the eighth straight year of dividend increases.

This decision is enabled by our strong financial position and consistent cash generation, which has benefited by the growth of our less cyclical PNM day and freedom boat club businesses and is consistent with our policy objectives of sustaining our dividend throughout an economic cycle.

I will now turn the call back over to Dave to continue our outlook comments.

Thanks Ryan.

Although 2020 is presented many challenges our businesses are executing extremely well against our operating and strategic priorities.

In the propulsion segment, we continue to leverage the strongest product lineup in the industry to gain market share in the parts of the market, where we've been historically underrepresented.

I'll further growth into salt water Repower International commercial markets is being enabled by the manufacturing capacity added in 2018 and 19.

And we will be bolstered by exciting new product launches in the coming months.

Finally, with lower engine inventory levels across the globe, we continue to increase production in an efficient manner to refill the pipeline.

And the PNM segment, we anticipate steady demand for aftermarket parts and accessories as both is complete the end of season. So thing in all the markets. We also expect demand to remain high for our OEM product lines and integration services as both buildings continue to ramp up production to replenish pipeline.

Ahead of the 2021 retail season.

In our boat segment, we will continue to focus on launching new products across the portfolio, including some new products designed for younger folks is.

Ramping up production to meet demand and refill pipelines and making progress with our stated plan to further improve operating margins.

If we didn't book club continues to expand and execute against this strategic growth objectives. We've added over 30 locations. Thus far in Twentytwenty with franchise the demand for Brunswick products pacing well ahead of anticipated levels.

We're making rapid progress with our enterprise wide initiatives in digital marketing E Commerce consumer insights and data analytics, while also driving our strategy forward.

One recent example of our Ace investments is outgrowing the partnership with the marine autonomy companies see machines in which we announced yesterday and additional investments aimed at advancing autonomous piloting for marine vessels.

Progresses. These initiatives will be accelerated by new leaders with very contemporary skillsets, joining our senior leadership team.

In the last few weeks, we welcomed on you Denari, who has deep experience in advanced mobility systems as the new President of of Brunswick Group.

Well, Mike Adams, who has been leading many of our digital initiatives has been promoted to the CIO role Im Brett Dow has been named Vice President Investor Relations.

Earlier. This week, we also announced that registry field sales is joining the Brunswick board.

Reggie is the former president and COO, Nintendo North America, and has deep knowledge of digital technology, and developing compelling consumer content and experiences.

Before we close I want to provide a brief update on our initial view of 2021.

As you know the progression of the global pandemic remains very dynamic and the potential impact to our dealers OEM partners suppliers and the macro economy is difficult to predict.

However, we do have improved insight into next year due to increased clarity on wholesale boat demand the impact of Mercury's continued propulsion strength.

The consistent growth of the PNC business on the availability of cash to fund our planned capital strategy actions and growth initiatives.

We will provide a clearer view on our forecast for the 2021 marine market during our Q4 earnings call in early 2021.

However, in a reference scenario, what us marine industry unit demand is flat to up low single digit percent for the year, we would anticipate consolidated revenue between 4.7 to 4.9 billion.

Adjusted operating leverage of high teens to low twentys percent Angie.

Adjusted diluted EPS in 2021, a $5 75 to $6 25.

With growth coming in several areas.

First we forecast strong gains in our propulsion business as we continue to take market share, resulting from an enhanced stable industry leading products.

Next we believe that we will capture a significant growth in wholesale boat sales given the historically low pipelines and strong retail demand.

Which is back not only by strong dealer orders ahead of the 2021 retail season, but also from an increased percent of dealer orders that are already retail sold.

However, note these projections do not assume that we will fully rebuilt the pipeline in 2021.

We also anticipate LPMI business to continue its steady expansion as both to spend time on the water.

Finally, our capital strategy should generate favorability as a result of debt reduction and systematic share repurchases.

I want to reiterate our continued confidence in our ability to successfully execute a 2022 strategic plan.

Also ensuring that we continue to prioritize protecting the health and welfare of our employees in the COVID-19 environment.

Given our strong financial position, which enables continued investment in new product and technology development, our industry, leading products, which are generating continued market share gains current low pipeline levels. The performance of Freedom book Club and our focus on operational efficiency and cost containment, we expect to meet the 2022 final.

Actual objectives shit in Miami in February.

This morning, we announced that our board of directors has elected Nazi Cooper as its new non executive Board Chair effective November 1st.

Now see is the first female board chair in Brunswick's history.

Nothing succeeds money Fernandez, who has announced his intention to retire after more than 20 years of service to the company.

I want to personally thank money for his decades of supports and leadership to Brunswick, and I look forward to continuing to work in that sweet as we successfully execute our marine focused strategy.

Finally, our operations teams are keenly focused on applying and enhancing our COVID-19 health and safety protocols, while continuing to ramp up.

Global production to meet unprecedented market demand.

I want to once again, thank our 13000 global employees for their commitment hard work and vigilance during this challenging time.

I also want to thank our loyal long term customers and welcome the New Brunswick boaters on freedom members, who have been able to enjoy the safe outdoor fun with family and friends and Twentytwenty.

I will now open the line for questions.

Thank you.

Ladies and gentlemen, if you have a question at this time. Please press Star then one on your telephone.

Your question has been answered or you wish to remove yourself from the queue. Please press the pound key.

And our first question comes from the line of James Hardiman with Wedbush Securities.

Hey, good morning, guys.

So im going to ask sort of a.

Weird question, but.

Bear with me here I mean, I've been covering you guys for the better part of well I don't want to aging myself, but.

A big part of my answer.

Analyzing the business.

Certainly managing the business has been just understanding the cycle right.

And we find ourselves.

Situation, where we're in the midst of a recession and yet the industry is going to be up high single digits.

So my question is as we look to 2021.

Should we be thinking about that is the first year of an economic recovery or the 11 year.

I think most industry observers had sort of resigned to the fact that maybe we'd get to.

200000 units at the peak of the cycle or maybe a little bit better and that was about it Im curious how you think about the long term potential.

From an industry perspective, and whether or not anything has changed.

And how you're sort of cycle thought informs your capital strategy right sitting on.

600 million in cash 600 million in free cash flow.

Obviously the way you think about the next few years is going to inform what you invested so sort of a big picture question, there, but but any thoughts would be welcome.

Thanks, James very much well it is a big Big picture question, but thank you for thank you for asking it I think.

Obviously this year is is how.

Some unusual trends in it but.

But we intend to fully capitalize on those trends in a way that I think.

Will influence our business for many years to come.

It is clear that we are over indexing on new boaters and diverse boats is versus the industry.

And we will be working hard to retain those new voters and.

And indeed in next year and the year beyond make sure that additional people join I believe that as a potential network effect of which will be extended if you think about this year.

We have all these new boats is and returning last spoke to us but that really that decision time was very sure. They had to decide between essentially April when we were in the depths of the first stage of the pandemic, whether they were going to suddenly buy a boat.

I think given the amount of publicity around boating, and thus the safety and utility and enjoyment IB.

We'll leave that there will be many more people.

Making longer term decisions that will support us for a number of years to come.

In terms of the way we kind.

I kind of think about the business right now I think we've made it clear today that we were in the middle of a multiyear effect from a wholesale perspective.

As Ryan mentioned earlier, even producing at historically high levels, we will not make significant progress in increasing the pipeline in 2021. So we believe that the wholesale driver this year.

Multiyear.

Wholesale drivers I would tell you that when we talked about our reference strategy here. It is a reference strategy I would say, it's a cautious.

Strategy every leading indicator that we have points too much more robust retail demand.

But we don't know exactly what we don't know right now and so we thought we would offer the strategy that presents.

Presents the business in a way a kind of a kind of neutral market way how would how would we do in the neutral mark.

Market.

The way that we've generated cash this year certainly puts us in a I think a strong position to accelerate some of our growth investments, whether those are organic or potentially inorganic position.

Positioned ourselves extremely well for a range of scenarios, probably more quickly than we would have anticipated just a few months ago or even a year ago. So I think we find new energy in the business right now around.

Around the retail demand and wholesale demand.

Our objectives are to capitalize on that not just in the short term, but also in the long term.

That's really helpful. Thanks for entertaining.

Yes.

Yes [laughter] okay.

Thank you. Your next question comes from the line of Scott Stember with CL King.

Good morning, Thanks for taking my questions.

Scott.

My main question is just on the.

Credit worthiness of the people that you have come to you and obviously, we're in the early stages of a potentially multi year.

Cycle here of a lot more.

Much younger consumers coming into this market could you.

Give us any additional color on.

You know what the I know, they're younger as you mentioned before about the income level and the credit worthiness and give us some comfort that we won't have.

Some issues potentially down the road.

Yes, Scott this is Ryan we've actually been tracking this obviously through our blue water retail finance organization, and we are not seeing any major changes or shifts and the credit worthiness of the potential buyers. So.

Interest rates remain low financing remains very available and two today, we have not seen any market shifts.

Okay Thats all I have thanks.

Thank you. Your next question comes from the line of Craig Kennison with Baird.

Hey, good morning, Thanks for taking my question.

Hope, it's different than what I just heard but.

Wanted to really understand mercury in the market share trends better.

I know you've had the Evan rude when you've also had OEM wins with sportsmen and into.

I guess I'm wondering if you can help us understand or quantify really the share gains that you've seen and then help us understand what's driving it it feels like it's been.

A huge year in terms of market share wins and Im guessing maybe some of your OEM partners are getting a.

A peek at what your future innovation looks like but just want to understand those trends better.

Thank you.

Great to hear from me.

The market share gains a significant.

And we as we said earlier in the year that we are already trending ahead of our 2022 objectives, which were part of our.

Miami presentations, so clearly mercury is accelerating even faster than we had anticipated.

I think.

We clearly have the best product lineup in the marketplace and.

I'm very excited about what is frankly, just around the corner as well, which I think will extend that.

Leadership.

I would say, though that.

Mercury is a very very reliable partner and the.

It's important for our customers not just have the best product, but be able to get it reliably and so the investments that we've made.

Over recent years and also the.

Level of partnership that we demonstrate I think is superior to our competition these wins.

Just come overnight they come the long periods of investment in terms of relationship building as well as.

Displaying the benefits of a new technology.

I would say that.

You mentioned some of the bigger wins, but just over the past year, we have 44 zero new OEM customers. So you can tell how fast this is happening and we are well positioned to capitalize on that trend, it's very significant and thats a lot of momentum in it.

And Craig I would also add to that that we still have areas, including Repower international markets and salt water, where we still are under index to our U.S share. So there is still runway to go ample runway to go on the on the share gain so it's not a.

We're not close to the finish line there there's still work to be done and as Dave said, what the best products in the industry and more to come. We're we're excited to go out and tackle that.

Thanks, and since James open the door on these big picture questions ill slip one in here your your new President of the boat group.

Has an automotive background, including work in this eight asked field and I know you just made that investment in sea Ray Sea machine robotics.

To what extent extent are we on the cusp of some significant revolution and kind of the the operations of a boat is that.

Thats and I overstating it.

I would say that there is significant progress in.

A lot of the same areas of technology that you will see in other verticals, we do have a difficult and different use case in a boat.

But nevertheless.

These things are going to be more material to our business in the next several years and so we need to position ourselves with the right talent.

To be able to fully capitalize on that and differentiate ourselves.

Our new BBGI broke president on yet Denari is indeed, most recently from that of field of electronics and.

But.

Hey, Doug.

System. However, she is a long.

History in operational excellence strategy.

And product developments in addition, which I think will equip.

To to run that business.

In a very very contemporary way in addition to advancing.

The technology suite in a way that I think differentiate will differentiate our product lines.

Great. Thank you.

Thank you for.

Our next question comes from the line of Eric Wold with B. Riley.

Six years.

Thank you good morning, guys.

A couple of questions around.

M&A.

Do you think about the increased comfort.

The 2020 few financial targets back in February are you are you seeing an easier path getting there without acquisitions or the assumed M&A.

M&A contribution the same as it was back when you first get those targets and then.

You think about the the acquisition opportunities out there.

Yes.

Have you seen any change with the recent surge around the number of opportunities expectations, becoming elevated and does this change your view of potentially.

Increasing further new boat category itself or is that something you are still somewhat again.

We still have a very active M&A funnel.

So we are proceeding as we.

As we previously indicated.

Looking to add.

Again at growth opportunities and we continue to focus.

The majority of our efforts exactly as we indicated which is in kind.

The p. they annuity oriented businesses service businesses like freedom et cetera, So I'll kind of Bulls eye. If you like has not really changed.

2021 for the purposes of simplicity, we did not include any.

Panic growth opportunities, but we remain very.

Simply looking in that area and we do indeed see a number of.

Interesting opportunities.

Perfect. Thank you guys.

Thank you.

Question comes from the line of Joe Altobello with Raymond James.

Hey, guys good morning.

So I guess first question. This is probably a hard number.

Within that high single digit.

U.S., we feel that as we grow.

How much of that you think is coming from.

Number two.

Normally I'm just trying to quantify maybe what the Kobe tailwind for lack of a better term.

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Yes, it's a good question Joe I think.

I think in the middle of the year, we definitely had a significant contribution from new and lapsed boaters.

I would say that we do believe though that.

Because of somewhat constrained inventory that they probably displace more.

More traditional boats as who would have.

The circumstances, probably upgraded that both this year.

So.

Given the inventory constraints it is a little difficult to.

Kind of understand exactly.

What the dynamics of that effect would look like in the out years I think.

It is possible next year that we'll be seeing similar levels of influx of new boaters and people.

Who wanted to wanted to go.

Great this year, but didnt have an opportunity to kind of re entering the market as well.

I'm sorry, it's not a great asset to your question, but in a in a supply constrained environment, which we kind of are in right now it's difficult to know than that.

No I understand.

And I guess secondly, Brian you did some really good numbers.

Good color on unit pipeline, we still.

You want to.

Yes.

Obviously, we'll see.

Selling very nicely.

A higher price so.

Yes.

Well on the core business.

Yes, Joe SBS do continue to to climb and even in light of a little bit more strengthen our value product. This year I think people, putting more content on their product up and down the line up whether it's value or premium is really driving that so yes, I would tell you that probably.

Some tailwinds there also.

Also combined with the fact that some of our.

More premium brands, such as whaler, specifically have new product line up on new product that is ramping now and probably we'll see a little bit more retail next year as as opposed to what they did this year. So I would say, yes on your ASP question.

Great, maybe just a bit I don't.

This helps but.

We're running a day into the Fort Lauderdale boat show, but we're already seeing.

Sales from the first day of oil is ahead of last year, even with.

The extended delivery times that we would now be quoting so it is clear that there are people who may be delayed that purchases. This year and another thing I'd better get in the queue, otherwise I'm not going to get anything.

Right. Okay. Thank you.

Thanks, Joe.

Thank you.

Our next question comes from the line of Gary Johnson with BMO capital markets.

Hi, good morning. Thank.

Thank you.

David When you address 2021 guidance you mentioned clarity.

Clarity with overall demand driver.

You didn't mention clarity on supplier cost or anything like that you could talk about that part of the equation.

Guidance for 2021 anticipate.

New capacity and what levels of capacity utilization really be at.

She grew 2020 2021 numbers.

Yes, Thanks, I think maybe answer the last of no. It does not anticipate any new.

Capacity it does not anticipate any bricks and mortar there may be some local.

The smaller things that we need to do.

But given.

The demand we are certainly looking not really a lot of bricks and mortar, but other ways to potentially increase capacity and we're actively studying that right now.

On the cost side.

Certainly.

Seeing a little more pressure from suppliers to constrained at the moment, probably by their own internal capacity and may be experiencing kind of tier two pressures as well at the moment I would say on the cost side from on the supply chain side doesn't look like thing anything that we couldn't contain.

No very largely contain.

Our our ability to ramp up.

Wow.

It is it's been very good and I think.

We've been hiring a lot of people, we hired 900 people across the operation.

In Q3 at 900 production workers in Q3.

We're still hiring pretty successfully but certainly as we go through the dynamics of coal within the different states, we see different levels of absenteeism that we have to.

Compensate for so the.

The 2021 forecast is really.

A.

No new major capacity actions, assuming that we can continue right.

Reasonable levels of operational ramp up.

In that scenario as Ryan mentioned don't really put it the big Dent in the in the in our we were not able to recover a lot of pipeline I would see that is not.

That is less than we really would like to do the lease. So we are certainly studying ways in which we could ramp up faster.

But it would not be material materially impact our footprint.

Okay.

And then.

Right now your inventories down 20, <unk>, 27% year over year.

It looks like you'll have to flow a lot of materials in the next couple of months to hit that sales guidance.

Given the state of supply chains, how confident are you and be able to achieve revenue growth.

13% to 15% I guess.

Well so far.

We're very actively managing and monitoring of supply chain.

We I would say that although we were experiencing.

Issues that we need to manage on a daily basis, nothing is really slow.

Slowing us down so.

It's possible that will happen, but that is not the current situation.

I think we're all managing our way through the.

Through the cobot environment as best we can both us and our suppliers and so far we've managed to do that so essentially we.

Well, we have short term shortages, we manage that.

Hi, Ken.

Exactly what might happen in next year, but.

Obviously, if there's a major disruption that's going to impact those right now we seem to be management okay.

And and I believe that we can ramp up as we need to to deliver the 20.

2020 month forecast.

Thank you and our next question comes from the line of Mike Swartz with cruise.

Good morning.

Hey, Mike.

Yes.

2020.

Ryan you can help us.

Yes.

Operating leverage.

Yes.

Yes.

Quarter.

No no.

In terms of.

Strong.

The.

So I.

I guess.

Yes.

Yes, Thanks, Mike and then this is something we obviously anticipated coming into the call. The third quarter was quite strong really at the gross margin line, we had very favorable mix in propulsion and really throughout some of the PNM categories as well and also some lower retail discounts in the boat group as you were.

Imagine given the state of play in the retail market.

Also opex was down in the quarter, obviously op X percentage of stronger sales and frankly, just operating efficiency across the board benefiting from the cost takeout measures that we did in 2019 I end earlier this year and then when you look to the fourth quarter, there's still going to be some benefits on the gross margin line I probably.

The a bit muted a little bit more muted due to the smaller sales increase that we're anticipating.

Mix benefits, probably would continue a little bit, but not quite to the same extent.

And remember you've got some seasonality in there obviously with.

Lower sales projected and propulsion NPL day, just due to the usual course of play and then on Opex in the fourth quarter. Just a couple of things there is a little bit more R&D expense coming.

Coming out of Mercury, which I think most people will say thats a good thing because that means good things on the horizon.

And a little bit more variable comp that is associated with our better performance. So you know it.

It's not a it's not a big number obviously, we did the fourth quarter leverage is still within our our usual kind of between.

High teens and low Twentys goal on a couple of things weigh in a little bit in the fourth.

Okay.

Yes.

Yes.

Uhhuh level I guess given the amount.

Given the.

What did you.

Change.

Financial.

Over the next.

Yes, I mean that Mike, we obviously are going to end up in a position at the end of the year, which is where we strive to be a one and a half times I assume you mean, our financial leverage from a debt capacity standpoint.

Correct.

Yes, we're going to we're going to be in a good place obviously by the end of the year and as we continue to pay down our term loan that that number is going to get close at a one time and all that does is it enables us to ramp up as needed for a large investment whether it's product or M&A or the like I think we've shown with the.

Power products deal that we are able to leverage off and well for the right deal.

And you know the rating agencies seem to.

Be okay with that given that we know that there are days are good mergers and acquisitions deals and good assets out there so.

We are we are OK leveraging up for the right asset, but continue to work it down over time I think given the the nature of what we do in our industry I think keeping it two times or lower or really one and a half times lower will still remain our will still remain our goal.

Thanks.

Thank you next.

Your next question comes from the line of Brett Andrews with Keybanc capital markets.

Hey, good morning.

I may have missed this but how much of your boat.

Production slots have a customer name on it or is retail sold at.

At this point versus maybe how much is allocated to the dealer restocking.

Yes, we really don't give that exact number Brad I would tell you. It's you know it.

It's less than its less than half, but it's more than usual at this time of year.

Got it Okay and then on on Slide 25, where you talk about the 21.

EPS Bridge just a question on the smaller PNM a contribution in that slide I mean, what are the underlying assumptions there and you know that underwriting less boat usage of restocking next year versus the other segments.

Yes. This is another one we anticipated pretty pretty straightforward I just because it comes it pops out a little bit on the chart. This shouldn't be surprising me underpin a business is a more steady grower more annuity based it grows a little bit with an inflation plus add some market share gains and other things.

And the OEM businesses I think we had a very strong we're having a very strong second half in that business you saw that the revenue gains in the in the third quarter I think if you take our guide for the fourth quarter that impute, some pretty strong DNA growth there as well so that's a business that they are able to kind of.

Restock, a little bit more continuous whereas engines in both it takes a little bit of time to refill refill the pipeline.

I would note obviously that PMT segment as Dave mentioned is one where M&A is where where one area where we're targeting that description does not include M&A on that on that page or into 575 to 625, So there's probably a little bit of a maybe.

Maybe a little bit of conservatism there, but this is a fantastic business that really elevate our earnings floor and any economy in any marketplace as shown by its performance in the second quarter. This year when essentially the world the world stopped for two months.

All right. Thank you.

Thank you and our next question comes from the line of Shawn Collins Citigroup.

Hi, Craig.

Great Hi, David Brian Brian Good.

Good afternoon.

Okay.

So my Sean.

Hi, Mike.

She is on margin.

And specifically margins.

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Topline trends are obviously quite healthy.

But in addition, your operating margin came in at what I believe is a record margin of 9.2%.

You have done a lot of hard work around cost realignment and restructuring.

I wanted to ask is this a margin and a level of profitability that you think is sustainable in the future. Thank you.

Yes. Thank you for the question, Yes, we certainly believe it's sustainable.

And we certainly plan to grow that even further.

I think we obviously in the third quarter and fourth quarter benefiting from volume.

But we're also.

Working through ramping up.

Onboarding people training people and having some inefficiencies in that process. So I think our strategic actions in the boat group flowing through nicely cost reductions.

Organizational consolidation in addition to the strong product line and the and the some of the new products coming through but we have room to run on those margins.

Both on the efficiency side and I think on the gross margin side as well. So we're I think that this is a great a great trend very glad to see it but expect mall.

Hi, there.

That's great. Thank you guys.

Maybe just a quick second question on supply chain.

You just touched upon some extent already.

But we certainly hear again a lot of questions on this subject.

As Ryan accurately said, yes, the world stopped for two months and.

And then it could restart at all at the same time.

And that's created some longchamp can you just talk about some specific areas, where you've seen more challenges and good morning, your pure putting a little bit more of your time to obviously successfully navigate any supply chain concerns there. Thanks.

Hi.

I think that.

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We have the benefit of a you know a propulsion supplier that from Mercury that invested tremendous tremendously and capacity and efficiency and continues to invest them. So I think all of Mercury's customers unit.

Normally a benefiting from not only mercury's great products, but its tremendous investment in capacity and so that takes an issue off the table, but the other people might be.

Experiencing I.

I would say that as we go through.

The various waves of Cove, it affects different states and even different countries somewhat differently. So for example, Mexico or the northern States and Mexico, where a lot of.

Wiring harnesses and other electrical systems that developed.

Of experiences some ups and downs, although right now that area is producing very well so I wouldn't not isolate any specific kind of sub system as an issue I would just say that we are continuing to manage.

I'm working extremely well with our supplier partners on we're very thankful for all the efforts that putting in.

There is nothing right now that is rises to the kind of area of holding the business back.

I understand that is helpful. Thank you for the time.

Thank you thanks, Sean.

Thank you.

This time, we would like to turn the call back to date for some concluding remarks.

Well. Thank you all very much for attending today and thank you all for the wonderful questions. As you could it's been in some ways a challenging year for all of us including our employees.

But our whole team is very very excited about the energy in the marine market. We believe we have a unique platform and our investments in products and technology and capacity position us exceptionally well to capitalize on the situation.

All of our retail and wholesale leading indicators suggest this is a multi year and very robust effect.

I'd like to close by personally thanking our outgoing chairman Manny Fernandez for his tremendous partnership over the last two years I wish him every success in the future I know, we'll stay closely in touch and by warmly welcoming Nancy Cooper as our New Board Chair and Reggie fuel same as a great New board member.

Thank you all very much.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude todays program you may all disconnect.

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