Q4 2020 Brunswick Corp Earnings Call
Good morning, and welcome to burn suite corporations fourth quarter and full year 2020 earnings conference call.
All participants will be in a listen only mode until the question and answer period.
Today's meeting will be recorded.
If you have any objections.
You may disconnect at this time.
I would now like to introduce Brian dull.
Vice President of Investor Relations Sir Please go ahead.
Good morning, and thank you for joining us.
With me on the call. This morning are day adults Brunswick.
And Ryan <unk> CFO.
We begin with our prepared remarks, I would like to remind everyone that during this call. Our comments will include certain forward looking statements about future results. Please keep in mind that our actual results could differ materially from these expectations.
Details on the factors to consider.
Refer to our recent SEC filings and today's press release all of these documents are available on our website at sounds like dotcom.
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 I will now turn the call over to Dave.
Thanks, Brad and good morning, everybody.
All businesses executed extremely well against our operating and strategic priorities in 2020.
Demonstrating the strength and resilience of our marine focused portfolio.
Despite the many challenges faced in 2020, including the significant disruptions to our global operations. During the first half of the year due to the global pandemic, we expanded gross and operating margins delivered an 11th consecutive year of adjusted EPS growth.
Generated record free cash flow.
The transformational changes we've made to our business in recent years have reinforced our position as the market leader in the marine industry.
And positioned us to meet or exceed our strategic plan and financial targets.
I'll propulsion business continues to deliver outstanding top line and earnings growth outperforming the market by leveraging our strongest product lineup in the industry.
And accelerating penetration into saltwater repower and international commercial markets.
Our parts and accessories businesses delivered strong top line growth and robust operating margins as a result of increased boating participation, which drove strong after market sales together with high demand for our full range of OEM systems and services as boat production increased during the second half of the year across the industry.
Within our boat business all brands contributed to the revenue and earnings growth over the second half of 'twenty 'twenty.
U S Marine retail demand continues to surge through year end.
Our premium boat brands remain the market leader as a net categories with a series of significant new product launches underway.
Value brands continue to offer attractive entry points to new and returning form of boat shows.
[laughter] associated retail demand resulted in historically low pipeline inventory levels with 40% fewer boats a day.
At the end of 2021st at the end of 2019.
Finally, freedom boat club exceeded our expectations during 2020 by adding over 40, new locations on almost 10000, new memberships, while also driving exceptionally strong synergy sales across our marine portfolio.
Finally, although we continue to operate in an uncertain environment I have high confidence that we will continue to execute on strategy and deliver very strong shareholder returns in 2021.
I'll now provide some highlights on our segments and the overall marine market.
Our propulsion business exceeded top line and earnings expectations for 2020 by continuing to outperform the market due to the strength of our industry leading product lineup.
Field inventory is mercury outboard engine remains significantly lower than in past years, and we continue to increase productions to rebuild pipelines and meet exceptionally strong customer demand.
Mercury continues to gain significant retail market share in outboard engines, especially in high horsepower categories, where we have focused high levels of investment in recent years.
As a consequence of a constant product innovation and ability to quickly ramp up production.
And as a result of the capacity increases in 2018 in 2019 Mercury secured more than 70, you are enhanced OEM partnerships in 2020.
One recent win with the announcement of a major enhancement to Mercury's relationship with Crown lifeboats with Mercury, becoming its exclusive marine propulsion partner, beginning with 2022 multi year products.
Brokerage controls rigging up per pallet business continues to be the market leader with significant investment in technology, we need to increase sales at a time when boat Oems are ramping production to meet demand.
Your product and technology investments are also at the core.
Imminent, new propulsion and controls products that I will discuss more towards the end of the call.
Our parts and accessories businesses completed that first year as a separate reporting segment and delivered outstanding results in 2020.
Segment top line grew by 9% per year with aftermarket sales significantly outpacing recent historical trends.
Customers, increasing orders to keep up with production, resulting from the accelerating retail demand.
2020 results were bolstered by very healthy boat usage as a consequence of the need for social distancing friendly recreation and.
By favorable weather conditions in the U S throughout the year, especially compared with 2019.
In addition engine P&A business enjoyed increased demand to supply products to our dealers in support of increased service needs.
In our distribution business, which added 1700, new dealer customers. During the year was also able to capitalize on both the increased participation and the extended fall season in both the marine and RV spaces.
The advanced systems group, which includes all the brands and operations in our power products and Atwood businesses demonstrated significant second half sales and earnings improvements leveraging the same aftermarket and OEM trends, while advancing restructuring actions to drive long term efficiencies.
With solid operating margins. These annuity based businesses strengthen our overall financial profile and provide a robust baseline earnings from which we can continually invest in our businesses and return capital to our shareholders.
Yeah.
Our boat segment finished 2020 with lowest sales and earnings for 2019 as a result of pandemic related plant shutdowns in the spring.
Production ramp up activities that continued through the fall.
However, the searching retail demand environments together with prior cost reduction and organizational initiatives led to a phenomenal second half of the year, but saw revenues increase by 19% operating earnings increased by 85% operating margins expanded by 330 basis points when compared with.
The second half of 2019.
Additionally, we exited 2020 with operating margins above 9% over the last two quarters, which is in line with our strategic plan targets to achieve double digit percent operating margins in 2022.
Pipeline inventory levels, a key driver of future wholesale boat sales ended the year at approximately 19 weeks the lowest level at year end for the last two decades.
Boston Whaler and CRA has seen very strong retail sales and net dealer inventories are especially low.
Our value brands have also performed well at retail and will also require significant pipeline replenishment.
We continue to hire additional work because at most facilities to ramp up production, but it is very unlikely the pipelines will be significantly rebuilt until 2022 at the earliest.
Freedom boat club continues to exceed our growth expectations with a 35% increase in memberships and 20% increase in locations during 2020.
In addition sales of Brunswick boats into the franchise network are exceeding expectations each.
Each boat rig with a mercury engine and equip without PNA products.
Just recently freedom was named a top franchise or 2021 bright franchise business review.
Our market research firm to perform independent surveys of franchisee satisfaction free.
Freedom was one of the 200 honorees commended for the exceptional support and leadership demonstrated in leading franchisees through the challenges of 2020.
Next I'd like to review the sales performance of our business by region on a constant currency basis.
Full year sales increase was just 2019 in most regions with international sales up 10%.
Sales in the U S up 4%.
Asia Pacific led the international growth with continued strength in commercial propulsion and P&A.
Canadian sales lagged slightly as Canadian boat dealers had more inventory ahead of the Covid shutdowns did not reopen per sales as quickly as other geographies.
However, we saw recovery in the fourth quarter as Canadian revenue grew by 19% with additional growth anticipated in the region in 2021.
Europe also delivered strong and propulsion growth as dealers and distributors were able to get higher horsepower engines that have been capacity constrained in previous years.
Yeah.
This table provides some color on the performance of the U S Marine retail market for the first half second half and full year of 2020 with comparisons to 2019.
All boat categories reported retail gains in the second half of a full year of 2020.
The main powerboat segments were up 32% in the second half of 2020, I'm more ups 30 per cent for the full year with Brunswick Brunswick unit retail performance in line with the market growth rates.
Your product launches, including the new Boston Whaler two 'twenty into 50 don't list models, which debuted in December provide confidence in our ability to grow share in 2021, especially in margin accretive premium categories, such as saltwater fishing day boats and cruises.
Oh boat engine unit registrations were up <unk> 35 per cent, but back half of 2020 with mercury significantly outperforming the market as they have done all year.
In fact Mercury gained retail share in 2020 in just about every horsepower node with outsized increases in logical outboard engine over 200 horsepower.
As we enter 2021 retail continues in growth mode.
Lead generation finance applications dealer sentiment and other leading indicators all remains very positive.
In addition, similar to our comments on the last call.
End of 2020, our percentage of dealer orders received with a customer name already attached is at least two times the percentage from the start of 2020 and pushed several brands three or four times.
All these factors give us high confidence in the continuing strength of the retail market as we move into 2021.
I'll now turn the call over to Ryan for some additional comments on our financial performance.
Thanks, David Good morning, everyone.
Full year net sales were up 6% and adjusted operating earnings increased by 9% adjust.
Adjusted operating margin finished at 13.2% 40 basis points higher than 2019, which is an outstanding accomplishment by our business units considering the challenges faced by all of our businesses. This year due to the pandemic.
Our operating leverage fell within our targeted range and we finished the year with an adjusted EPS of $5, seven which exceeded our most recent guidance due to the strong fourth quarter performance.
2020 also saw record free cash flow generation, which I'll discuss in a few minutes.
And so the fourth quarter results exceptional execution together with continued robust retail demand accelerating production levels and strong late season boat usage drove outstanding results in the quarter with significantly better year over year comparisons.
Net sales in the quarter were up 27%, while operating earnings on an as adjusted basis increased by 59%.
Adjusted operating margins were 12, 5% up 250 basis point versus the fourth quarter of 2019.
Finished the quarter with an adjusted EPS of $1 32 up.
61 per cent from prior year.
I'll now discuss our fourth quarter performance on a segment level.
Starting with the propulsion segment revenue increased 33% at each product category experienced strong demand, especially in controls and systems and higher horsepower outboard engine categories.
Market share gains and favorable changes in customer mix also contributed to increased revenues.
All customer channels showed growth in the corner as boat manufacturers continued to ramp up production and increased capacity enabled continued elevated sales to the independent OEM dealer and international channels.
Operating margin and operating earnings were up significantly in the quarter as a result of increased sales volumes and the associated favorable factory absorption from the increased production, partially offset by favorable unfavorable impact of higher variable compensation costs and increased investment in new product development and technology.
And our parts and accessories segment, let me think <unk> 27 per cent and operating earnings were up 56% versus fourth quarter 2019, due to strong sales growth across all product categories.
Adjusted operating margin of 15, 6% with 280 basis points better than the prior year quarter with the strong sales increases together with favorable product mix driving the robust increase in operating earnings.
Another outstanding result for the aftermarket driven annuity based business.
Revenues in the boat segment were higher by 20%, resulting from significantly higher wholesale sales to dealers both to meet increased customer demand at the retail level and to begin rebuilding pipeline inventories.
All of our boat brand steadily ramped up production in the fourth quarter to meet this demand.
Increased production and sales resulted in higher operating margins of $9 two per se.
890 basis point increase compared to the fourth quarter of 2019.
Each of our boat product categories contributed to the margin growth with Boston whaler and line delivering strong double digit operating margin for the quarter.
Finally freedom boat club continued to see revenue and earnings growth in the quarter.
And at operating margins that are accretive to the overall blended operating margin.
As a result of the surge in retail demand.
And the pipeline ended the year at historically low levels, our lowest pipeline inventory levels in over 20 years.
Our boat brands ended the year with 19 weeks of boats on hand measured on a trailing 12 month basis with units in the field lower by 40% versus year end 2019.
The update the reference scenario, we laid out on the third quarter call.
We wholesale folds out of home or 28000 votes in 2020, while retailing almost $38000.
We believe that our current manufacturing footprint will support the production necessary to satisfy the anticipated 2021 retail demand, but we continue to work with our brands to unlock additional near term capacity through automation and labor and select capital initiatives.
Resolving pipeline levels at the end of 2021 would still be well below desired levels, but we anticipate that this will position us for strong wholesale sales again during 2022.
Longer term, we are addressing capacity constraints with the announcement made earlier this week regarding the efficient investment to repurpose, our palm coast facility in Florida for larger Boston whaler product and expanding our facilities in Reynosa, Mexico, and the Lenovo Portugal.
We expect to begin seeing benefits from these actions in the second half of 'twenty 'twenty, one with even more significant benefits by the end of this year.
We successfully executed our capital strategy in 2020, as our significant cash flow generation enabled us to meet or exceed our capital objectives.
Pausing activity during the early days of the pandemic.
We ended the year with $587 million of cash and generated $629 million of free cash flow.
We deployed $182 million for capital expenditures as our cash needs as always begins with the investment in new product and capacity projects across our businesses, which we believe will be the bedrock for future revenue and earnings growth.
We completed approximately $118 million of share repurchases, taking advantage of a lower stock price early in the year and increased our dividend for the eighth consecutive year.
We retired $115 million $155 million of long term debt, leaving our net leverage at one four times on a gross basis.
Our investment grade credit remains strong with our yearend cash balances cash flow generation capabilities, and total liquidity affording us the opportunity to deploy capital in a variety of ways depending on market conditions.
While we remain very cognizant of macroeconomic headwinds and other related uncertainties. Our continued strong performance and a robust marine retail environment has created improved visibility into our substantial growth opportunity for 'twenty and 'twenty one.
The progression of the pandemic remains very dynamic and the resulting impact on our dealers OEM partners suppliers and the macro economy is difficult to fully predict.
However, given our improved clarity on our ability to drive growth throughout the year, we are providing the following guidance for 2021, we.
We anticipate U S marine industry retail demand up low to mid single digit percent for the year versus 2020.
Revenues of between $4 75, and five point and $5 billion.
Adjusted operating margin to grow between 60, and 100 basis points with operating expenses as a percentage of sales to be lower than in 2020.
Adjusted diluted EPS in the range of $6 to $6 45.
And finally free cash flow generation to be in excess of $300 million.
We're also providing directional guidance regarding the first quarter, where we anticipate revenue growth of approximately 25% over the first quarter of 2020 with adjusted operating leverage of high teens to low twenties per ton.
Note that year over year comparisons of quarterly performance are very likely to be volatile throughout 2021, given the significant impact of the pandemic on our 2020 results.
Finally, the 'twenty and 'twenty, one expectations assume no major additional pandemic related business continuity issues. In addition, as we've cautioned in past quarters. It cannot be overstated that the level of recovery of the global economy continued stable channel operation the ability to moderate labor and input costs and the app.
Since a significant additional disruption to our global operations and supply chain will be important factors in determining whether we ultimately performed in line with our targets.
I'll conclude with an update on certain items that will impact our P&L and cash flow for 2021.
As mentioned on the previous slide we anticipate generating free cash flow in excess of $300 million in 2021, which we wanted to return to more normal historical free cash flow levels.
2020 for a significant amount of cash generated from the liquidation of inventories, which is likely not to repeat in 'twenty 'twenty, one and we estimate working capital increased by 140 to 100 day.
For the year, primarily to rebuild inventories in our propulsion and P&A segment.
Note that under the current plan, we would still generate more than $900 million of free cash flow between fiscal year 2020 in 2021, which would result in a free cash flow conversion from over 100%, but the two year period and thats without sacrificing any investments in our businesses.
Our estimated effective tax rate for the year was approximately 23% with an increased cash tax rate of mid teens percent also impacting our year over year free cash flow comparison.
Note that our current effective tax rate estimate does not reflect any potential changes in statutory tax rates.
We anticipate between 125 and $135 million of depreciation and amortization expense and then our average shares outstanding will be approximately 78 million shares.
We anticipate executing a balanced capital strategy in 2021, leveraging our strong cash position, we plan to retire all $100 million of my long term debt obligations with our interest expenses estimated to be about $60 million per year.
During 2020, we pause certain capital expenditures during the pandemic to conserve cash until the second half of the year.
We anticipate returning to more normal levels of capital spending during 2021 of between 202 hundred $20 million, including new product investments in all of our businesses cost reduction and autonomy, Tom mentioned projects and select additional capacity initiatives.
Finally, we plan to continue our systematic approach to share repurchases with our plan, including between 80 and $120 million of repurchases in 2021 spread relatively evenly across the year.
2020 will also see a renewed focus on M&A activity, primarily in our parts and accessories and business acceleration business units, including expanding freedom boat club.
Consistent with our past approach our 'twenty 'twenty, one guidance does not assume the completion of any transactions, but we fully expect M&A to provide opportunities throughout the year.
I'll now turn the call back over to day to continue our outlook comments.
Thanks Ryan.
Moving to our outlook by segment. We believe 2021 is setting up to be a fantastic year for all our businesses.
As a quick reminder, comparisons will be more favorable during the first half of 2021 line compared to the first half of 2020 that saw significant disruption in our businesses due to the early stages of the pandemic.
For our propulsion segment, we anticipate net sales growth for the year to be in the high single to low double digit per cent range with operating margins up more than 20 basis points versus 2020.
While these propulsion sales increases are extremely strong sales increases in our boat segment will be even more pronounced as mercury was in a much stronger inventory position heading into the pandemic shutdowns of 2020 and Mercury continued to ship engine through distribution channels in late March and early April.
We expect earnings growth to include margin expansion associated with new product introductions.
Increased factory absorption from elevated production levels and currency tailwind, partially offset by regional sales mix increased tariffs due to volume increases and some increase in spending on products technology and other strategic priorities.
A top priority for this segment continues to be satisfying outboard engine demand and expanding market share.
The introduction of new products.
Continued success in providing industry, leading propulsion solutions couldn't even existing OEM customers.
We also anticipate additional margin benefits as we satisfy greater levels of demand and the dealer Repower and international channels.
We remain focused on developing new platforms and technology for our engine product line and related control systems and are investing in exciting new product families that we project will enable topline and earnings growth into the future.
Turning to our parts and accessories segment.
To remind everyone that these businesses derived more than 75 per sides of their revenues from aftermarket sales.
P&A segment experienced the least amount of disruption to its business in 2020 as in most cases, despite some regional disruptions.
Well to ship products to customers during the early stages of the pandemic.
As a result of the significantly increased levels of boat usage in 2020, and the related parts and accessories consumption. We anticipate organic net sales growth in the mid single digit percent range for 2021.
We expect margins to grow slightly in the year as we expect growth in our advanced systems group and our distribution business to outpace certain higher margin engine P&A products that had extremely strong second half of 2020.
This area will continue to be the primary focus of our M&A activity as we look for opportunities to further build out our technology and systems portfolio.
Potential bolt on deals in this area are generally in the $20 million to $50 million range, which can be funded from free cash flow and existing cash balances.
The realignment of the power products and Atwood businesses under a new advanced systems group operating structure announced in 2020 will provide a streamlined operating model to increase margins moving forward.
We'll benefit from an improved industry outlook in 2021, and this business is more heavily weighted towards OEM customers.
We're very excited and confident in the outlook and growth opportunities for the high technology product lines in this business and also expect to significantly expand our systems integration customer base.
Finally, our boat segment stands to benefit from most most from year over year comparisons that's all of the businesses in our portfolio. This business experienced the most significant pandemic related operational disruption in 2020 with extended plant shutdowns in late March and early April.
Could ramp up in production through the second half of 2021 second.
Second half of 2020 that not continues into 2021.
As discussed earlier the boat segment will be focused on improving operational performance fulfilling demand in refilling pipelines in a very robust retail environment, which should lead to top line growth with more than 30% and strong improvement in operating earnings and margins.
With three quarters of our entire calendar year 2021 wholesale orders already received and with several brands largely sold out into 2022, we anticipate consistent production throughout the year, which should result in cost efficiencies.
We anticipate exiting 2021 with operating margins approaching double digit target for the segment.
As Ryan mentioned earlier, we are reopening our palm coast, Florida facility to provide Boston whaler with additional capacity.
While also expanding our existing Mexico, and Portugal facilities.
These capital efficient solutions to significantly expand our boat manufacturing capacity will ensure that the brands produced at these facilities are well positioned to take advantage of future market demand, while avoiding substantial increases in fixed costs.
The boat group plans to hire over 1000, new employees throughout our facilities in 2021 to support our planned production growth.
We will continue to expand freedom boat club and execute against its growth strategy.
We anticipate adding up to an additional 50 locations in 2021, including some outside the U S. While capitalizing on our synergy opportunities and offering expanded range of services to franchisees.
Notably the Freedom fleet conversion to Brunswick boat. Some Mercury engine is ahead of plan and we anticipate strong sales into the franchisee base in 2021.
Yeah.
In addition to all the growth opportunities already discussed we also have enterprise wide work streams that are advancing acis technology strategy deepening our focus on sustainability and VDI and driving the implementation of a full portfolio of digital first initiatives span all business units and product categories.
We are continuing our pivot to satisfy tomorrow's consumer by deeply understanding their needs offering new modes and entry points with participation.
Thing that customer journey, so its various stages of consideration transaction ownership participation retention on EBIT disposition and reconsideration.
A wide range of digital assets and tools and your communities.
Although there was no interest in consumer electronic show in 2021, we plan to be back at CES in force in 2022.
A recent example of expansion of our product offerings to better serve our customers and partners with the launch of boat checker.
Digitally enabled direct to consumer business that simplifies the pre owned boat buying experience provides consumers confidence in the transaction.
This pilot is primarily aimed at assisting all freedom boat club franchisees.
The share access partners to more efficiently divest that sleep products cleared the way for new Brunswick products.
Our investments in accelerating improving our digital assets and capabilities and digitally engaging our customers continues to yield benefits as 2021 early season inputs and interest industry shows continues to be scaled down postponed or canceled due to COVID-19.
These cancellations have not influenced our wholesale and retail demand projections moving forward and in several cases, our virtual events in 2020 generated highest sales in the equivalent physical shows in the prior year.
Brunswick and its employees were recognized for that in the fall months contributions and initiatives many times during a challenging but very strong 2020.
We averaged almost one major award per week, including receiving multiple innovation Awards awards, highlighting our commitment to diversity.
C and inclusion sustainability performance and receiving our first ever CES Innovation Award.
Before we take questions I'd like to leave you with a few days to circle on your calendar.
First something we sent it out for a while.
The 11th Mercury will be launching the most technically advanced and sophisticated propulsion system in the industry.
I'm very excited about this.
This launch will be followed a week later by the official launch of the beautiful New Sea Ray Sundance at 370 outboard.
The sea Ray product with a new sea Ray design language.
The first of many industry advancing products that all businesses will be launching during 2021.
Additionally, although we will miss seeing all of you in person for our annual Investor event in Miami, We are planning for a virtual investor event day.
Later in the spring, but it'll be prerecorded viewable on the line at your convenience.
We hope this is a one day detour and we very much hope to be able to welcome you back in person to an investor day in Miami in 2022 as part of the recently announced expanded Miami International boat show.
Brunswick has an exciting year ahead, and I look forward to sharing more information on our progress against our 2021 and 2022 goals and financial targets.
We progressed through the year.
To that end I will also today that our current expectation for 2020 to EPS is that it will be at or above $7 per share.
Finally, I want to once again off a heartfelt thanks to our global employee population all of their hard work and sacrifices during this very challenging 2020.
It's because of their outstanding efforts that we've been able to continue to execute our strategic plan while at the same time prioritizing protecting the health and welfare of the entire Brunswick team.
We'll now open the line for questions.
At this time I would like to remind everyone in order to ask a question. Please press star one on your telephone keypad.
Total cost per I guess, a moment to compile the Q&A roster. Thank you.
Yeah.
Your first question comes from the line of Grace Smalley. Your line is open.
Hi, Good morning. This is Greg good morning from Jpmorgan. Thank you Scott.
One of my question I guess, firstly on the retail side.
But you're asking.
Right.
Could you elaborate on the leading indicators you are seeing in the market to support that.
Touching on retail trends you're seeing.
You know in January.
Ryan on the wholesale side could you walk through how many.
The average length of Gs typhoon.
Based on 2021.
'twenty 'twenty two taking into account everything.
Yeah.
Thank you Ryan.
Oh, yes, good morning, and thank you for joining us.
In terms of.
Retail market mix in.
In 2021, we have a lot of leading indicators that we've been monitoring.
As you know.
Obviously, we're a seasonal business, but through the fall and winter months, we've continued to see elevated levels of retail demand.
Typically 40% or more above prior.
Prior year levels.
Leading indicators such as retail financing applications.
I looked recently with 60% I think up in.
In the last week or so.
So our current expectation is for continued strength as we go into the year.
You know potentially a little moderated in some areas by inventory availability, but we expect to see.
Our strong start to 2021.
And good morning, Grace I'll I'll take the wholesale question. So as you heard the stats on 2020.
Wholesale accounts about 28000 and we.
And we retail sold about 38000, we believe that given our current footprint, we have the capacity in order to produce at wholesale to match retail. This year. So you can think of that as.
Around 39000 units on high 3800, 39000 units, which would represent the low to mid <unk>.
Percentage increase in the retail market and then when you start looking at out years, it's obviously difficult to.
To forecast, but I would say given and all of the work we're doing at our facilities. In addition to the capacity projects that we announced on Monday, we could probably add a couple of thousand boats.
At wholesale in each of 'twenty, two and then in 'twenty three but obviously all of that is contingent on.
Supply chain continues to be strong as being able to get our hiring needs to produce that amount and frankly, just good operating across our footprint, which we anticipate doing.
Great. Thank you very much.
Okay.
Okay.
Your next question comes from the line of Greg, but dish Canyon. Your line is open.
Hey, guys, it's actually Fred Wightman on for Greg I'm wondering if you could help us size the opportunity either in dollars or just sort of anecdotally with those 70, new OEM contracts that you touched on for the engine side are any of those really showing up in the reported numbers that we've seen so far is that something that we should start to ramp in 'twenty, one and into 'twenty two.
Should we sort of think about the contribution from those.
Yeah, Hi, so I think the.
Your point is a good one even when we.
Once those contracts that's typically the start of the process for us too, but obviously the customer has to.
Get rid of inventory of the previous brands and then we begin to phase in typically the best time to phase in a new propulsion system its model year.
So if we announce a.
New relationships or expanded relationships in the back half of two.
2020 for example.
Full impact is unlikely to occur until the 'twenty 'twenty.
Two model year, which would be June of 2021.
So I would say that we are not yet seeing the full impact of any of the expanded relationships on new relationships that we announced in the back half of 2020.
And then Fred I think I would add when we set out in our 2022 strategic plan. We obviously had in mind that we would be conquesting and getting these new accounts and growing our share with our Oems. So when you see our when you see our outlook some of that is baked in obviously, but we are we're doing quite well.
And our.
Strengthening our relationships with the Oems.
Great and then just finally.
You guys alluded to some supply chain tightness, a few different times touched on it for the PNA side. Some on the outboard side as well can you sort of just walk through you know.
Where you see the biggest disconnect in terms of supply versus demand across the segments and how you should think about those sort of normalizing as we move through the year. Thank you.
Thank you Yeah, I think what we're what we're really doing when we talk about supply chain. Here is is recognizing a risk that is to be honest not manifest itself yet in a very significant way.
Italy is.
Kind of influencing some of the unknowable portion of of how we position our guidance.
So we've seen.
Some of the categories that have expanded a lot.
Pontoons, but we.
We see a bit of tightness in pontoon furniture.
We have seen.
<unk>.
Some tightness around transportation, obviously is.
Number of goods from all kinds of sources is being shipped.
That provides a bit of tightness I would have to say, though this is a telling you that it is tight it's not telling you that it's really affecting us materially.
At this point in time only that it's more of a risk, but we're cognizant of as we expand further going forward.
Great. Thank you.
Your next question comes from the line of Craig Kennison. Your line is open.
Hey, good morning, Thanks for taking my question I wanted to go back to that capacity expansion and boats.
And wonder is there a crossover impact on the engine business or your parts and accessory business to the extent you add capacity in boats will you need to add a similar amount of capacity in those categories or does that already exist in the system.
No theres an effect certainly.
We add those additional boats, obviously, our brands are 100%.
100% supposed to mercury and as much of our P&A as possible.
And he kind of as Ryan mentioned, as we kind of step our way through this.
We will have some effect in the back half of 2021 of this additional capacity.
And then we expect to add probably a couple of thousand units in 2022 and another couple of thousand.
So that will be a material impact that's 10%.
Probably skewed.
A little more towards but because the Boston whaler or a little more towards a strong a stronger margin boats and higher content.
So there is a full stack margin impact.
They're across all of our businesses.
Although we are working.
Working on dimensioning.
And Craig just in case. This is a follow up question, we do not need to invest in bricks and mortar.
Mercury two to cover the additional engine and P&A.
That was really handle back in 18 and 19.
That's great that was a follow up and then maybe just then I'll use a different follow up which is you know dealers are making great money today because of the massive shortage in inventory.
Obviously, you want to get back to a more reasonable level of inventory, but is this giving you reason to rethink what the optimal level might be of structural inventory once you get back to closer to balance.
Yeah, I think we will be working with our channel partners to.
To work out exactly what that is we certainly are in at the moment in an unusual time.
But.
We have as you know 17 boat brands and I think last count about 600 models.
So keeping inventory for that.
Kind of SKU count requires quite a lot of models in the field. So they are all available at some level.
So I can I think at the moment antibody with inventory is at a disadvantage. So we will certainly not be.
As we look at inventory levels, we will be very careful about not placing L brands or the availability disadvantage.
In the field. So that May I think there may be an opportunity to re look at the inventory levels.
One of the things that we focused a lot on it.
Is the right inventory. So we work much more closely with our channel partners now to help them understand what is selling.
Both in terms of models and option content.
So they don't get left with slow moving inventory.
So that is a way in which we can be more efficient, but still have the right number of models.
Available in the field.
Great. Thank you.
Thanks, Greg.
Your next question comes from the line of Mike Swartz. Your line is open.
Hey, guys good morning.
Just wanted to touch on the on the incremental boat capacity, you've called out just looking at maybe from a different angle.
Other incremental costs associated with that that are flowing through the P&L is that just capital expense and then it goes to the P&L how should we think about the cadence of those costs coming through during the year.
Hey, Mike Good morning, its Ryan.
There is obviously some capital expenditure that's involved.
Certainly at Palm coast as we bring it up to speed to be a whaler facility and then a little bit of expansion in our Portugal facility, but it is that is included in our plans and in the guide for Capex and obviously also included.
And the margin performance guidance that we gave today so.
There's a little bit in 'twenty, one a little bit more in 'twenty two but it is it is all included in in the guide and frankly anticipated as part of our normal Capex budget.
These are not large investments large impact, but the investments are pretty moderate.
Okay. That's helpful. And then just just with the commentary on getting to $7 plus by 2022, I think when you outlined.
Outlined your 2022 plans back in early 2020.
You'd really built that around a flat industry, so 13% growth 2020.
Mid low to mid single this year, obviously, we don't know what's going to happen in 2022, but it sounds like the three year average is going to come in above flat.
Any way to think about how big that number could be or maybe what some of the offsets are that you've maybe experienced since you originally gave that 2022 guidance.
And I'll take that one again.
Listen.
Obviously, there are some tailwind and some headwinds.
Certainly the market is.
Good tailwind right now Michael.
To be said there is still things that we will be fighting against obviously no. One no one saw the pandemic com.
Where we can get to I think you know when the original range was six.
25 to 725, we've kind of put a stake in the ground as a floor and I think the where that can go depends on execution. It depends on the continued successful product launches that we're having.
We fully intend to do well I will make one comment that the the $7 or more does not include.
Any impacted M&A, so to the extent M&A would be completed between we do believe we will this year and next year that would be accretive to the overall to the overall goal.
Yeah, I would just add.
I think as we as we were thinking through guidance. This time, we thought it was more important to start establishing some flaws than it was to fully incorporate the potential stack of opportunities, but here as we go through the first portion of this year will be we will be looking.
Again.
We're protecting for some unknowable at the moment.
And we do think certainly but the.
The full stack of opportunities is very significantly.
Great. Thank you.
Yeah.
Your next question comes from the line of.
James Hardiman your line is open.
Hey, good morning, guys.
Some day.
Good morning.
So Ryan I wanted to maybe just extend some of the math a little bit further maybe just put a bow on this I mean, it sounds like if we extend some of the wholesale retail map out.
Into <unk> into 'twenty two.
For all intents and purposes this replenishment.
Cycle, if you want to call it that.
It's going to go into 2023, right unless we see a pretty dramatic drop in in 2022 retail to the tune of.
To get to north of a 20% drop before we can completely bridge.
10000 unit.
Delta that was created in 2020 and that doesn't even really account for.
You know keeping weeks on hand constant.
Am I thinking about that the right way.
Yes, you are.
Yes Matthew.
Your math is right.
Right and Theres No reason, we should be.
Thinking about a massive drop off in 'twenty Ravi it's way too early to give guidance on 'twenty two.
Theres nothing that would suggest that we would go sort of pre 2019 levels, which is what we'd be talking about once we exit all of it.
We certainly don't see that gains in India increased more diverse participation in boating.
More people getting back into the activity that had been gone people jumping into freedom boat club I mean, all signs I think point to people wanting to be outside they want to be on the water and the change in People's lifestyle, I think with more flexible work arrangements and other lifestyle changes it really offering people the ability to Rex.
We ate outside more and different times, so I, we're just not seeing.
A path to what you would say is a significant decrease in boating participation our new boat sales.
In the near term.
Got it and then second question.
We worked through some of these these cash flow numbers.
We're targeting $300 million in free cash flow I'm, there's 100 million each for for debt and share buybacks.
So that leaves another $100 million and your cash on the balance sheet as at least close to a record.
So I guess first what what's the right level of cash to hold on your balance sheet.
And then assuming that it's not.
$620 million, how should we think through some of these other opportunities obviously the obvious answer is M&A.
I'm curious what opportunities are not specifics, but what opportunities are presenting themselves in terms of valuations in the market right now.
And then maybe secondly, it's free.
Freedom boat club is almost like M&A.
That you own that you already own to a certain degree so maybe think about.
What investments in.
Your own franchises or or corporate owned club.
Clubs that freedom boat club and how to think about.
Turn profile on that.
Alright, well, David I'll try to unpack all impact the first part of that maybe I'll, let David speak up.
Okay. So first up I would tell you that just like our strategic plan I would go ahead and allocate.
100, or so million M&A this year and next year right that is that part of our plan.
And that's something that free cash flow will allow us to do.
Coming down from the $6 29, and it really starts with working capital reversing this year, we grew working capital up kind of over $200 million.
I think youll see a pretty significant reverse in 2021 solely because we need to build inventory and again building inventory in propulsion and P&A. Just a reminder, we don't have a whole lot of boat inventory primarily web as.
As we sell the boat directly to the dealers are quickly after they are manufactured.
And then there's puts and takes on a little bit more capex.
A little more taxes paid so I think once you once you sit down and see the working capital reversal, which is significant Ryan it's going to be three $350 million youre going to get to.
Number around around 300 free cash flow and then ending cash we're very comfortable with ending cash anywhere between 300 $400 million I think we will likely still be at or about that at the end of the year, we could be a little more or a little less but that gives us plenty of room to go.
With our untapped credit revolver.
But we are always available to affect GAAP gives us enough liquidity.
And maybe Dave on freedom and some of the equity, Yes, hi, James So on well I think maybe yes, there are acquisitions available that.
We are on our M&A.
Teens are a I would say active at the moment.
In the spaces that we have previously.
Indicated.
Our strategy is going to be.
<unk> and <unk>.
Terms of freedom.
Kind of related businesses.
We are pursuing are already aggressive strategy with freedom as we.
Get the Coke business on its growth trajectory, we are able now to focus on how we build out monetizing the business.
How we expand that not just in the U S, but internationally and I would tell you that we will be in our investor day in spring.
Presenting.
You are with a much more comprehensive view of what freedom might look like over the long term domestically internationally and with adjacent.
Business opportunities.
It's really helpful looking forward to it thanks guys.
Thanks, David.
Your next question comes from the line.
And Glenn Chin Your line is open.
Hi, good morning, Thanks for taking my question.
I guess earlier this year, we talked about how much recently had already eclipsed one of the targets that were laid out at the Investor day could you maybe update us on how you're thinking about 2022 in terms of the market share gains that we can do that.
Yes.
We try and stay away from being too specific on this but I would say that mercury's momentum if anything is accelerating.
And.
When you see the product that we're going to release very soon.
Only going to increase the acceleration so.
I'm, sorry about not being too precise, but I would say.
The trend is extremely favorable and accelerating and we expect to continue.
Okay got it thanks, and then turning to free.
Margin.
I guess does this incorporate some of the catch up on R&D or other opex that was pushed out from two.
2020, excuse me prioritize kind of about the pandemic earlier in Q2.
Yes.
In 2020, we did not slow down any key strategic initiatives. So we kept investing in product developments and our digital strategies there were some items of.
Kind of maintenance type stuff that we've pushed out and they certainly will be caught up in.
And this year I would tell you, though that we certainly are.
Increase.
Increasing our investments in technology, particularly around a strategy.
We'll see that not only in our business units, but also somewhat.
Enterprise costs.
Some of those technologies are advanced enough so that we need.
Kind of a holistic enterprise effort.
So yes, the capital expenditures this year will reflect some catch up.
On.
Kind of maintenance type activities. Some further obviously investments in new product.
Some capacity as we've outlined in I would say some increased investments in our acos that relate to technology strategies.
Great. Thanks.
Hey, Ben.
Your next question comes from the line of Gary Johnson Your line is open.
Great. Good morning, Thank you.
So excluding that supply it sounds like the flow is pretty good so I shouldn't be concerned about getting to the 25 per cent. Once your top line growth with inventory down 14% on particularly looking at the whip down 7%. It seems like youre going to have to flow a lot of fun.
Inventory per quarter. So if you can talk about that I've talked about that per second.
Yes, no garik, where we're pretty comfortable with what the revenue guidance, yes, there's there's pockets of inventory down obviously, you've got to date.
David Little deeper I think we are we're building capacity and building inventory and keep a pulse scenarios and PNA as well obviously, there's places that were a little bit more I hand them out, but we're working through that obviously in getting product to our to our dealers and OEM as quickly as necessary and remember a lot of our P&A.
As delivered same day next day all over the world. So there's not a real need for it to fit and inventories very long and <unk> and the dealers.
When a customer makes that order, so I think where we're controlling it and obviously, we will watch for various pockets, but we're pretty comfortable with the.
With the first quarter guidance.
Okay great.
Beyond flow how about cost.
With the constraints of the bottlenecks that we're seeing everywhere.
We're seeing increased cost logistics.
All sorts of things any risk to your guidance that those costs baked in could go higher.
Well I suppose there's always a risk, but I think obviously, we have midyear pricing.
Our pricing.
It is designed to be you know net net net positive if you like and we have some adjustments that we can make in our businesses through the year, both are multi year for our boats.
During other periods.
Given demand I think Theres no reason, why we should not be able to to net out.
Costs, although obviously will be.
Imaging and pushing back everywhere, we possibly can I would say at the moment.
<unk>.
Uh huh.
Costs are containable.
Okay, Alright, great. Thank you.
Thanks, Karen.
There are no phone questions at this time, we would like to turn the call back to David for some concluding remarks.
Well. Thank you all very very much for joining US 2020 was a challenging year, but as you can see the business really fired on all cylinders, we anticipate doing exactly the same in 2021.
Regarding our guidance I would say that we incorporated not just non risk, but also some unknowable and probably not the full stack of opportunities that we have going forward. So we will continue to look at that as we.
Continue to.
To report earnings throughout the year of the new product launches in the next few weeks.
Punishing and.
You'll enjoy them. Please please stay in touch.
Very exciting and that's just part of the next leg of differentiation and growth for all businesses that we are.
Extremely excited about it and look forward to sharing more of that with you at our virtual investor event in the spring.
So thanks, everybody thanks to our tremendous team at Brunswick for a fantastic year and thank you all for joining us this morning.
This concludes today's conference call you may now disconnect.
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