Q2 2021 Brunswick Corp Earnings Call
[music].
Good morning, and welcome to Brunswick Corporation's second quarter 2021 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.
Brent Dong, Vice President Investor Relations.
Please go ahead Sir.
Good morning, and thank you for joining us.
With me on the call. This morning are Dave Foulkes, Brunswick's, CEO and Ryan <unk> CFO before we begin with our prepared remarks, I would like to remind everyone that during this call are common.
Bruce certain forward looking statements about future results.
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 in today's press release on.
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, Brent and good morning, everyone.
Health businesses had another outstanding quarter, we closed the first half of 2021 by delivering record results as a result of continuing strong retail demand outstanding operational performance and success in mitigating material supply and labor challenges.
Yes.
All of our businesses delivered exceptional growth during the quarter on.
Our propulsion business continued to realize strong outboard market share gains leveraging the strongest product lineup in the industry.
Our parts and accessories businesses continued to benefit from robust aftermarket demand.
Driven by elevated boating participation.
Our boat business posted its second consecutive quarter of double digit adjusted operating margins, despite significant supply chain transportation and labor challenges.
Robust retail demand for our products in the first half of the year.
Driven field inventory levels to the lowest level in decades at approximately 9 weeks on hand.
And we are progressing our efforts to efficiently increase capacity across several of our facilities to satisfy orders from our global customer base and begin to replenish the pipeline.
Yeah.
As many of you know we've also had a busy few months on the M&A front.
At the end of the quarter, our advanced systems group significantly expanded its product and brand portfolio by announcing the signing of a definitive agreement to purchase <unk> an industry leader in Marine electronics.
In.
In addition, we announced in early July that freedom has expanded into Spain through the acquisition of <unk> Club.
I'll touch on both of these exciting transactions later in our discussion.
Given the unique demand and inventory environment together with continued strong boat usage through the prime season, which.
Which drives TNA sales, we have improved visibility on our ability to deliver against an extremely favorable outlook for the remainder of 2021 and consequently, we have increased our 2021 guidance.
Before we discuss the results for the quarter I wanted to share with you some updated demographic <unk>.
Sites through the first half of 2021 and.
And comparisons with the favorable trends, we experienced in 2020 versus 2019 in the industry.
I am happy to report that we are not seeing any change in a significant metrics. We shared with you during our first quarter earnings call in April.
Bruce.
Average boat by age continues to be 2 years younger than the industry average.
Additionally, Brunswick's first time boat buyers continue to be younger than our overall boat buyer demographic and 3 years younger than the industry.
First time bulk buyers are trending more females than they did in 2020.
<unk> on.
Brunswick over index as to the industry by approximately 800 basis points.
And Freedom boat club the average freedom member continues to be almost 3 years younger than our typical boat buying customer.
And female freedom members makeup approximately 35% of our member base.
<unk>.
We continue to outperform the industry and attracting younger and more diverse first time boat buyers positioning us for very strong growth in years to come.
These trends on an extremely important validation of our strategy to secure a healthy future for Brunswick and also favorable the entire marine industry.
I also wanted to share with you. Some awards that Brunswick received during the second quarter that provide more strategic proof points.
Brunswick received 6.2021 boating industry top product awards, including for the Mercury Marine 12, 600 horsepower idle on the CRA.
<unk> hundred 70 Sundance output, we highlighted recently.
But also for our Bayliner element and 15 entry level boat.
<unk> Smart battery hub.
Atwood Sahara, Mark to automatic bilge pump and multi guidance <unk> III kayak trolling motor.
Brunswick has also been recognized by Forbes for the second year in a row as 1 of the best employers for women.
And ranked second overall in the engineering and manufacturing category.
The winners were chosen based on a survey of 50000 U S employees working for companies employing at least 1000 people in the U S operations.
<unk> and.
And only 300 companies made the final list from the thousands of companies that were considered for the honor.
Finally, Brunswick recently had 3 employees and the Freedom boat club franchisee Bev rosella on it with a women, making waves award from boating industry magazine.
Very proud of these women leaders as you know equal opportunity inclusion and diversity are cornerstones of our culture.
I'll now provide some second quarter highlights on our segments on the overall marine market.
Our propulsion business continues to gain significant retail market share in outboard engines, especially.
Especially in the higher horsepower categories, while we are focused higher levels of investment in recent years.
For the first half of the year Mercury has gained share in each horsepower category over 75 horsepower with outsized gains in nodes in excess of 200 horsepower.
I'm also pleased to announce.
We began shipping the new 600 horsepower V 12, Berardo engine in late June and as anticipated demand has been extremely strong.
We are essentially sold out of the V 12 production slots for the remainder of 2021.
We estimate that just during the back half of 2021, we.
We will sell more outboard engines in this above 500 horsepower class that was sold in the entire prior history of the outboard industry.
Given the surging demand in the current environment and new product launches planned in the coming years Mercury's accelerating additional capacity investments that its primary.
Primary manufacturing center and funded like Wisconsin.
In order to maximize its ability to serve the market and capture further share.
Our parts and accessories businesses experienced significant top line and earnings growth and significantly over drove expectations in the quarter due to outstanding execution robust.
So as the market demand driven by elevated boating participation and favorable weather conditions in many areas.
The advanced systems group, which has a larger OEM components of its business and also serves certain on marine segments.
Benefited from prior year comparisons as a result of Q2.2020.
<unk> customer COVID-19 related plant shutdowns.
As a result, ESG realized significant growth across all product categories and delivered strong operating margins that were accretive to the overall segment.
Finally, as I mentioned earlier in late June our advanced systems group strengthened.
Our robust product and brand portfolio and significantly expanded its scaling capabilities by announcing the signing of a definitive agreement to purchase medical.
This action will further accelerate on Acis strategy.
And we will enhance our ability to provide complete innovative digital solutions to our consumers.
And its comprehensive integrated systems offerings to our OEM customers.
We believe this transaction will close in the second half of 2021.
On the boat segment had another outstanding quarter, posting its second consecutive quarter of double digit adjusted operating margins despite significant supply chain.
Uncertainty, while delivering output consistent with our production plans for the year.
We ended the second quarter with historically low pipeline inventory levels due to consistent strong retail demand for our products.
Given the continued robust retail demand and our dealers continued desire.
And Paul available product.
On 2021 production slots are now sold out for the calendar year with 5 brands completely sold out through the 2022 model year.
In fact, the sum of our wholesale orders for 2022 multi year product is already roughly equal to our projected 2020.
To take full year wholesale boat group revenue.
We continue to hire additional new production employees at most facilities to maintain production consistent with our stated plan.
We remain on track with our plans to ramp up on staff the pump close facility and expand our operations that were no certain Portugal.
Additionally, we've identified capital efficient investment options to further raise capacity to approximately 50000 annual production units by 2023 should this volume of product be required.
Freedom Boat club also continues to exceed our expectations growth.
On both.
Anticly and through acquisition with a young and diverse customer base.
With the recently announced acquisition of <unk> Globe and expansion into Spain Freedom now has 314 locations and 44000 memberships network wide and is closing in on 4000 boats and the.
Both our GAAP income fleet with an increasing percentage of Brunswick products.
The outstanding operational and financial performance I've been discussing has not been without some external challenges that our businesses continue to manage and mitigate sometimes on a daily basis.
Our supply chain teams in particular performed extremely.
Really well.
Winter storms in late first quarter, and resulting power outages in central and southern United States disrupted the supply of oil based resident foam products throughout the second quarter.
Titan semiconductor supply raw material shortages and transportation disruption and.
Resulting cost increases continued to present challenges, which we are actively managing.
As a result, our businesses have implemented price increases that are higher than normal, but we believe are generally at the lower end of those implemented across the industry.
The global reach of our supply.
Net work and our unique scale in the marine industry together with our purposeful vertical integration.
Have so far enabled us to mitigate these challenges and keep our production plans on track for 2021.
I want to thank our supply chain and operations teams as well as our third party supply partners, we're continuing to work.
To ensure the manufacturing continuity necessary to satisfy our robust market demand.
Finally labor conditions remain tight in many locations in which we manufacture product.
But our talent acquisition teams have been working hard on successfully to add manufacturing and other talent to our teams.
Together as we increase production.
Next I would like to review the sales performance of our business by region on a constant currency basis, excluding acquisitions.
As expected all regions posted significant sales growth in the quarter versus about 2020 and 2019.
Domestic sales grew 55% with international sales up 49% versus prior year.
We are seeing strong performance across all international regions with Asia Pacific still growing despite an extremely strong comparison in 2020.
We continue to experience.
<unk> robust demand around the globe, especially for propulsion products, and we will be working through backlogs in certain product categories through the remainder of 2021 and into 2022.
This table provides more color on the recent performance of the U S Marine retail market comparing the first half of 2000.
1 to the same periods in 2020 in 2019.
As is usual for this time of year the significant noise in the month to month, Ssi data, but the positive market trends continue.
All boat categories reported retail gains in the first half of 2021, continuing the momentum.
So from 2020.
Despite more difficult year over year comparisons in May and June the main powerboat segments is still up 17% in the first half of 2021 versus 2020.
And up 13% versus 2019.
Brunswick year to date unit retail performance.
<unk> is generally in line with market growth rates with strength in outboard boat categories.
Outboard engine unit registrations were up 5% in the first half of 2021, when compared with the same time period in 2020 with Mercury's first half growth more than doubling the market growth.
Right.
Resulting in significant market share gains as I discussed earlier.
As we enter the second half of the year U S lead generation dealer sentiments and other leading indicators all remain very positive.
Approximately 40% of the boats, leaving our manufacturing facilities are retail sold.
<unk>, which is approximately 3 times historical averages.
In addition, 5 of our brands, including whaler have all model year 2022 production slots are already sold.
All these factors give us high confidence in the continuing retail strength as we complete the 2021 selling season.
Season and move into 2022.
I'll now turn the call over to Ryan for some additional comments on our financial performance.
Thanks, Dave and good morning, everyone.
I am pleased to share with you the results from another fantastic quarter to provide perspective on the slides that follow we have included comparisons in.
Certain places to both the second quarters of 2020 and 2019 in order to highlight the outstanding performance in each of our businesses over the past few years.
When compared with 2022nd quarter net sales were up 57%, while operating earnings on an as adjusted basis increased.
Creased by 126%.
Adjusted operating margins were 17, 1% and adjusted EPS was $2.52.
Once again setting new all time highs for any quarter for which we have available records.
Sales and earnings in each segment benefited from strong global demand for marine.
Index with earnings also positively impacted by favorable factory absorption from increased production and favorable changes in foreign currency exchange rates, partially offset by higher variable compensation costs and increased spending in sales and marketing and aces and other growth initiatives.
And finally, we had free cash flow of $268 million in the second quarter with a free cash flow conversion of 135%.
First half comparisons are equally as favorable net sales through the first half of 2021 were up 53% when compared with the first half of 2020.
And operating margins of 17% were a 520 basis point improvement from 2020.
This resulted in first half EPS of $4.76.
And a very robust operating leverage of 27%.
Turning to our segments.
<unk> revenue in the propulsion business increased 64% versus the second quarter of 2020, as each product category experienced strong demand and market share gains.
Consistent with the themes from the first quarter boat manufacturers continue to ramp up production in the second quarter and our increased capacity enabled.
<unk> continued elevated sales to the independent OEM and international channels.
Sales growth was also strong across all product categories, when compared to the second quarter of 2019.
Operating margins and operating earnings were up significantly in the quarter benefiting from the factors positively affecting all.
All of our businesses.
And our parts and accessories segment revenues increased 42% and adjusted operating earnings were 46% up versus the second quarter of 2020 due to strong sales growth across all product categories.
Adjusted operating margins of 23, 2% were 6.
The basis points better than prior year quarter.
With significant sales increases driving the robust increase in adjusted operating earnings.
Sales growth was also very strong across all product categories, when compared to the second quarter of 2019.
This aftermarket driven annuity base.
<unk> continues to benefit from more voters on the water, which is being augmented by flexible work schedules, allowing for more leisure time with the OEM component of the business leveraging investments in technology to take advantage of increased demand from boat builders as they continue to increase production.
As anticipated our boat segment results benefited the most when compared with the second quarter of 2020 due to last year's Covid related plant shutdowns and production ramp ups.
Sales were up 80% and operating margins were 10, 5% for the quarter. The second straight quarter. This segment has delivered double digit margins.
Each brand had strong operational performance executed their aggressive production plan and contributed to the overall segment's success in the quarter.
When compared to the second quarter of 2019 sales were up 22% and operating margins were up 160 basis points further.
Illustrating the foundational improvements that have been made in this business.
Operating earnings were also positively impacted by the increased sales and the lower retail discount levels versus 2020.
Freedom Boat club, which is included in business acceleration contributed approximately 3% of the segment's revenue.
At a margin profile that continues to be accretive to the segment.
Turning to pipelines our boat production continues to ramp consistent with our plans to produce approximately 38000 units during the year.
Despite producing almost 10000 units in the quarter, which is up 5% from the first quarter.
<unk> retail outsold the wholesale replenishment by more than 7000 units, bringing dealer inventories to an all time low of approximately 7400 units.
Our boat brands ended June with under 10 weeks of boats on hand measured on a trailing 12 month basis with units in the field lower.
50% versus same time last year.
Given our view that the industry retail market will be up high single digit percent for the year, we believe that retail will outpace our production targets, resulting in our year end weeks on hand to be lower than year end 2020 by several weeks.
We continue to work with our brands to unlock additional near term capacity through automation labor and select capital initiatives, including the capacity actions announced earlier in the year related to our Palm coast, Reynosa, and Portugal facilities, which will begin providing benefits by the end of the year.
Sure by 2021 is shaping up to be another year of robust earnings and shareholder returns with pronounced margin increases and substantial free cash flow generation, resulting from our outstanding operating performance and a healthy marine market.
Given the enhanced clarity on our ability to drive growth in upcoming periods, we are providing.
Adding the following updated guidance for full year 2021.
Without including the potential benefits from the <unk> acquisition, we anticipate the U S Marine industry retail unit demand to grow high single digit percent versus 2020.
Net sales of between $5.65 billion and $5.70.
$5 billion.
Adjusted operating margin growth between 150, and 180 basis points.
Operating expenses as a percent of sales to remain lower than 2020.
Free cash flow in excess of $450 million.
And adjusted diluted EPS of approximate.
At $8.
We're also providing directional guidance regarding the third quarter, where we anticipate revenue growth of mid teens percent and EPS growth of high single digit percent.
Note that we believe that the <unk> transaction once closed will be earnings neutral for 2021.
As we anticipate <unk> post closing earnings to offset the incremental interest incurred as a result of the deal.
Next I'd like to provide some perspective on our 2021 performance against 2020 and 2019 by looking at first half and second half results.
The revenue.
<unk> for 2021 will look more like 2019 and 2018 than it did in 2020.
The first half of every year has additional production days as the second half includes model changeover and holiday shutdowns.
However, first half of 2020 was materially impacted by the Covid related.
Revenue came down.
This resulted in the first half of 2021, comparing very favorably to 2020 on all of our businesses due to higher production volumes with additional earnings tailwind from improved absorption.
Favorable foreign currency comparisons and favorable changes in customer mix in.
Plant Ocean business.
These factors far outweigh the headwinds from supply chain challenges inflationary pressures and higher variable compensation expenses experienced during the first 6 months of this year.
Our first half performance. This year also exceeded 2019 and every metric.
As we head into the second half of 2021, we will face more difficult comps to 2020 as the company recorded record high EPS over the same period last year, and we will continue to be challenged with supply chain constraints and increasing input and freight costs.
Although we are taking price increases across our businesses.
We also anticipate moderated sales mix with propulsion sales trending more towards core OEM customers more typical seasonality in the PMA business.
And a higher percentage of overall growth in the boat business increased spending on <unk> and other growth initiatives smaller benefits from currency and absorption.
And it's higher tariff impact.
However.
Despite more challenging second half comparisons this continues to be a growth story.
We anticipate expanding topline in the second half by double digit percent versus the second half of 2020, which can be more than 40%.
2019 with higher earnings as well.
I will conclude with an update on certain items that will impact our P&L and cash flow for the remainder of the year.
The only meaningful update relates to our effective tax rate for the year.
Due to some fantastic brands restructuring work by our tax team and business units we.
We now believe our effective tax rate for 2021 will be approximately 22%, which is slightly lower than our estimate from our April call.
Similarly, and putting aside the financing related to the <unk> transaction, our capital strategy assumptions have not materially changed.
In the past few weeks however, we.
Several steps to strengthen our overall liquidity and shareholder return profile.
We extended and expanded our revolving credit agreement, which is now in effect through July of 2026.
Which now provides for $500 million of borrowing capacity, an increase of $100 million.
In addition, our board of directors increased our share repurchase authorization earlier this month and we now have over $400 million approved for repurchases, which we plan to systematically deploy consistent with our capital strategy.
These moves follow our substantial 24% dividend increase approved in April.
We've taken as we continue to balance desired increases in shareholder return and investment in growth initiatives.
We now anticipate spending $270 million to $300 million on capital expenditures in the year to support and in some cases accelerate growth initiatives throughout our organization.
This slightly increase planned spending.
April merely related to the Mercury capacity expansion the day discussed earlier.
I will now turn the call back over to Dave to continue our outlook comments.
Thanks Ryan.
On our April call. We felt that 2021 was setting up to be an outstanding year for all of our businesses.
On the combination of.
His primary robust retail demand during the first half of the year and solid operational execution by our businesses has us squarely on track to deliver against our operating and strategic priorities.
Our top priority for the propulsion segment continues to be satisfying outboard engine demand from new and existing.
OEM customers and expanding market share, especially in dealer saltwater repower and international channels.
We're continuing to invest heavily in new product introductions on industry, leading propulsion solutions that we project will enable topline and earnings growth far into the future.
And we've also recently taken the decision to accelerate the introduction of incremental capacity.
I'll pass on accessories segment remains focused on optimizing its global operating model to leverage its distribution and a position of strength and areas of battery technology digital systems.
On connected products in support of on Acis strategy.
We look forward to closing net abaco deal and beginning thoughtful integration into the ESG business.
We will continue to focus M&A activity and parts and accessories as we look for opportunities to further build out our technology and systems portfolio.
The boat segment will build on its first half successes by continuing to focus on operational excellence, improving operating margins launching new products.
Executing capacity expansion plans and refilling pipelines and the very robust retail environment.
I wanted to leave you today with an update on the progress we've made towards the next wave of the company's strategy highlighted during our virtual Investor day in May and our recent press releases.
In addition to the <unk> on Freedom boat club transactions and the start of shipments of the <unk> 600.
Third horsepower outboard, which I've already discussed.
<unk> points in the quarter included the launch of the my whaler CRA plus apps for Apple and Android users, which advances the aces connectivity strategy by improving the boat ownership experience.
Reducing friction across the entire ownership journey.
The initial reception of these products is extremely promising with more than 2000 accounts created in the first few weeks on a star rating of 4.9 out of 5.
And the launch of the heyday, H 'twenty to wake boat, a new leading edge rigs of model signaling a doubling down on this fast growing brand.
Appealing to a younger demographic.
This model is already sold out through mid 2022.
We're tracking well against all our next wave of strategic goals, including the electrification initiatives outlined in May.
Finally, I want to once again offer a heartfelt thanks to our global employee population.
Brand for all their dedication efforts and sacrifices during what is still a challenging time for our families and communities.
Your hard work has enabled us to seamlessly execute our strategic plan and significantly outpace our initial growth and profit expectations.
We'll now open the line for questions.
Ladies and gentlemen, we will now have a question and answer session.
We would like to ask a question. Please press star 1 on your telephone keypad.
A confirmation tone will indicate that your line is on the question queue.
You May also price start to if.
I would like to remove your question from the queue.
1 moment, please let me now poll for questions.
Our first question comes from James Hardiman with Wedbush Securities. Please proceed with your question.
Hey, good morning, Thanks for taking my call.
First just to.
Very brief clarification.
On the slide.
It's 20 to the first half versus second half.
I'm trying to take out my ruler here, but it looks like operating income is about flat.
Half of this year versus second half of last year.
Year, but then Ryan, but you may have said that the earnings are higher.
Year over year, there. So so maybe just a clarification there and then as production up.
Versus how you had previously guided for 2021.
Hey, James Good morning.
Second half operating earnings R&D.
Call up over 2020.
EPS is up a little a little greater than operating earnings operating earnings themselves are indeed up in the second half.
And then production I would tell you is right on track to what we had guided to earlier in the year and despite a lot of late nights.
Dean work with our supply chain and other folks where we're producing exactly as we anticipated.
Okay, perfect and so that leads me to my my broader question as I think about.
Supply chain.
What the bottlenecks are which is I think going to be but it's already been but I think we will continue to be the theme.
And hard on this second quarter earnings season.
Obviously, we've heard from some of your power sports peers, it's clearer than in a lot of cases.
On their plants are not necessarily at full utilization.
Because their supply chain is limiting the flow of parts and components into those plants given.
<unk> production assumptions seem to be.
Pretty consistent it doesn't seem like that's necessarily the issue for you guys.
I guess is that an accurate characterization of the current situation.
And that it's more of a cost issue rather than a.
Part.
<unk>.
Supply availability issue.
Hi, James It's David I would say that that's a pretty good characterization I would say that we we deal with the kind of new challenges every day and every week and so far we've been able to.
Mitigate them very successfully I would say the impact.
<unk> 2 was really certainly cost, but we are pricing to cover that and I did note.
That we believe.
Price increases on at the lower end of the industry, but certainly enough to cover the increased costs I would say that there is productivity impacts though.
We are maintaining our production, but I would say that.
Not always.
We have some boats and other things that we have to take off the line wafer pause spring back on the line those kinds of.
Production disruptions just mean that there is.
But some productivity impact, but so far we're able to continue production schedules.
With some of those kind of manageable impacts.
Got it and then just lastly from me I don't know if it is even possible just given all the moving.
On parts how big.
Our cost or margin impact do you think of that is for your guidance. This year.
Again, obviously, there are some topline impacts although those seem to be smaller for you guys than that then all of the expenses associated with it.
And expediting.
On inflation and all those sorts of things.
Yes.
Ryan I don't know if you have a good idea I think clearly we are on an annual basis pricing to cover inflation as we understand it right now obviously, what halfway through the year. So we don't necessarily understand everything but our plan is to continue.
To do that.
I would really measure this in kind of points of productivity.
I don't have already kind of translate to into dollars Ryan I don't see that the only thing I would mention Jamie since obviously the boat business continues to deliver on margins you've seen the guidance creep up I think the number 10 has made an appearance.
Any official guidance for the rest of it for the full year at 10%. So like Dave said, we're covering over with price.
But it certainly is a bit of a headwind.
Really encouraging thanks guys.
Thank you. Thank you James.
Thank you.
Our next.
Question comes from <unk> <unk> with Exane BNP Paribas. Please proceed with your question.
Hi, guys. Thanks.
Thanks for taking my question just on the pipelines are down a bit quarter on quarter and it seems like availabilities Jill maybe not fully there do you think that the industry is.
Enough availability retail could've been like I guess, how how much higher could retail it then.
If there was enough supply.
A way to quantify that.
Well in the.
Thanks for your question, but in the last call. We did indicate that we believed.
<unk> debt.
On an annual basis retail would likely be up.
I would several more points.
Without without retail constraints. It is very clear that people are buying what we can produce at this point in the year now we are as we.
As we.
Begin to get through the prime selling season over the next couple of months.
We'll be planning to build inventory again, assuming that the market develops as we expect so from 9 weeks now we would expect to be.
Kind of low.
To mid teens.
By the end of the year.
But right now and probably through most of the year.
Certainly as a constraint marketplace I don't know if I could.
Identify exactly what the the.
On the points out, but I would say that several points under the free demand.
Under the free supply.
Yeah.
Okay. Thanks, and then on freedom Congrats on the acquisition in Europe, just wondering how big the opportunity could be internationally and how those kind of boat clubs are received those concept received in Europe and any differences between those models in Europe versus the U S.
Kind of initial learnings there.
Yes, I would say that the appeal is.
The equal.
In the right marketplaces.
So for examples.
Spain, France.
Some parts of Italy suddenly.
U K.
Portugal from Portugal.
These are all areas.
You have.
Very strong interest in boating enough people with.
Financial capability too.
To join a boat club.
Concept is a little earlier.
And in.
In Europe than it is in the U S.
But really when you think about it freedom boat club was around a long time before we bought it and really had reached an inflection point just probably a couple of years earlier so.
As knowledge of the model.
Okay.
Becomes worldwide.
And as we professionalize that space with the same toolkit that we're using in the U S. We think the potential is really substantial obviously Europe is our second biggest market for Brunswick as a whole.
Model very very long history of recreational boating, both in the Mediterranean and.
Kind of near shore Atlantic So we will be working quickly to it.
To begin to establish some of the tools.
Techniques marketing.
Okay.
Professionalize the space.
We think the potential is very very substantial well beyond where we are right now.
Great. Thanks, guys.
Thank you.
Our next question comes from Scott <unk> with C. L. King <unk> Associates. Please proceed with your question.
Good morning, and thanks for taking my questions.
Hey, Scott.
Yes, I think I prominent on the answers Theres just based on the commentary, but just wanted to make sure have you guys with the lead times continuing to get extended ahead of any.
Really from on the supply side.
Have you seen.
Any accelerated rates of customer cancellations on boats.
No we haven't seen anything at all.
We know that.
Some of our channel partners have.
Kind of a potential second and even third customers signed up for boat.
And in case the lead customer.
Has it changed your mind.
So we are not seeing anything in terms of <unk>.
Increased cancellations.
Alright, and I know, there's a little bit further out.
And probably more than you guys want to.
Guidance on but just your initial thoughts on what.
2022 could look like whether.
From a retail perspective for boat. So do you think it could be an up year.
And if so how much.
Hey, Scott.
It's probably a bit premature to do on market call on next year, but but we do think retail will grow next year. That's our belief still we've talked about that on investor.
A day and as well as the first quarter call on.
In terms of in terms of guidance, we're not going to update the guidance that we gave on the <unk> call obviously.
<unk> 25 to 875 was our Investor day outlook for 'twenty, 2 and then we said that <unk>, we anticipated would add a net 50 or so.
To that figure and that's that becomes earnings less the anticipated additional financing costs. So that none of that has changed I would tell you, though that obviously.
On the jumping off point for 'twenty 2 it looks like it's going to continue to be a little higher because 'twenty 1 is coming in.
So wrong, so net no no real.
Is it all on our on our view to 'twenty 2.
Alright, and just last question on <unk>.
Last quarter, you talked about.
Within ESG talked about.
<unk> to install about 15000.
The fast from power systems for internal combustion.
Licenses I guess by 2.
2023, if you could talk about the timing of that and how significant that COVID-19.
Yeah.
So we're on track with that plan that the 15000 represents 2 things really represented the fathom Fathom type.
Generates a replacement from marine application.
<unk> plus.
The replacement of generators and recreational vehicle applications and we're actively.
Doing that we have a number of ASD team members.
Located on site at all of the manufacturers installing our advance battery systems.
And they become so popular that some of the on the manufacturers changing the standard.
Content to include this battery system instead of a generator.
And as soon as you move from being an option to being standard somebody has to deliberately.
Change.
The the volumes go up yes.
Very much on track.
Our advanced systems group connect business ASC connect.
You might remember is the part of the ESG business that works with.
Both boat builders and.
Bob.
Any factors in specialty vehicle manufacturers to integrate our systems.
Was up 133% in the first half of the year. So it's a very in demand service and people are taking advantage of this.
Great.
Portfolio.
On technologies that we have an article.
We've integrated on their behalf.
Excellent that's all I have thanks.
Thanks Scott.
Thank you.
Our next question comes from Fred Wightman with Wolfe Research. Please proceed with your question.
Hey, guys. Good morning, Thanks for taking the question I was wondering if you could dig into.
To the Mercury capacity, a little bit more that you outlined is that excuse me is that incremental to sort of what you had hinted at last quarter. What type of capacity uptick are you sort of planning for where is it targeted sort of that mid horsepower high horsepower anything that you could provide there would be super helpful.
Yes sure. Thank you for the question.
So yes. It is all incremental to what we had originally talked about and its being driven by <unk>.
Very strong demand for our <unk>.
Products It is roughly the same.
Additional increments of capacity adds.
<unk> increment of capacity that we put in.
During 2.
2018 in 2019.
And I would say, yes, it is over weighted to mid to high horsepower engine and its.
Mainly in our <unk> facility, which is why we produce most of our high horsepower engines on also in the supply base that supports it we have to make sure that our supply basis based on us.
Scaled.
Just the.
So internal facilities.
But just kind of connecting a few things.
We remain in very active discussions with potential new customers from Mercury, but on.
On a priority obviously is to support our existing OEM on other customers.
Yes.
And what that means right now is.
All of our existing the vast majority of our existing customers are ramping up.
That production.
And.
They need more engines from us.
That means we have to be careful about how we add new customers.
The same is it also means and I'm kind of connecting with something that Ryan said earlier about the second half of the year debt.
We we don't have as many engines right now as we would like to provide dealers for Repower for example, which is a very profitable channel for us.
So.
Priority is serve our existing customers, who demand going up and up on up.
And so it's the right time for US now to add more capacity. So that we can continue to bring onboard new OEM customers and also have enough engine. So that we can satisfy those high margin.
Top of Repower and international channels commercial channels et cetera that tend to.
<unk>.
10, 10 tend to have to fall out to some of the big OEM customers as we satisfy the demand.
Okay that makes sense.
Just another capacity question on.
On the boat side I think that you mentioned you'd be at 50000 units in terms of capacity by 'twenty..3 now I think that number in the past with something in the low 40 percents that you were targeting so sort of a 2 part question on those numbers apples to apples and then secondly, when could those start to hit is that something that could show up later in 'twenty 2 or is it really a 23 story.
David.
Yes.
This is new again, so we had we have.
Detailed plans that we're executing.
In fact, we're a long way along the way now to implement that capacity around 43 to 44000 units, which is up from the.
Kind of high <unk> that we had early last year, if you like.
So that is reopening the plants that we call out of the Flagler of pump coast, sometimes and then expanding our notes from.
The Lenovo facility in Portugal.
That drives up to 44000, but it is very clear.
With the pipelines, where they are on with retail demand where it is.
And with things like Freedom boat club, expanding really really quickly and demanding more and more boats.
The 44000 might not be enough and so we have begun.
Begun.
A series of steps to increment that 44000 up to around 50000.
That will require modest.
Additional investment, but as in most cases, not a significant footprint increases in a couple of cases there is footprint.
Inside.
<unk>.
Most of our existing.
Kind of land, but yes. This is the 44% to 50 is incremental.
And we'll be working on making sure that we can.
<unk> introduced it as quickly as we can but 2023 is currently the target.
So I would say that what we I don't know if we will need 50000 units, but I know that the signs are that we might and I would not want to lose market share certainly don't want to short freedom, which is growing like crazy. So we think it's prudent at this time to cost effectively build out that additional.
Optionality.
Perfect. Thank you.
Yeah.
Thank you.
Our next question comes from Anna <unk> with Jefferies. Please proceed with your question.
Hi, good morning, Thanks for taking my question.
First on the Dorado with.
I would now Kim fold out through 'twenty, 1 could you maybe contextualize that versus what your preliminary expectations right.
Payments on that engine.
Yes, and thank you for the question yes.
The demand for there'll be 12 is going.
Very high I think it's attracting a lot of interest.
<unk>.
Causing a number of boat builders to rethink that portfolio and put in outboards, where they might have put in boat engine is on bigger boats.
Yes.
Demand is certainly higher than our original expectations.
So we will.
Kind of work our way.
Second half of the year I think the comment that we made earlier was without being.
Very explicit about numbers to indicate.
Earlier, there was some other higher horsepower engines in the marketplace.
But this is different.
As I mentioned earlier.
We expect in the back half of this year, we will produce.
More outboard engines above 500 horsepower and will produce from the entire prior history of the industry.
So the scale of this engine at this horsepower level is substantially higher than anything else.
And.
Through this seeing very robust demand and a lot of interest on it is certainly higher than we originally anticipated.
Great. Thanks, and then turning back to the cash.
The investments to reach 50000.
On both unit number so I think in the Bakken with kind of prevented that you've identified.
Yes, it will be to ramp to that I guess are you committing to capitalize on that.
When would that decision hockey and.
In order to ramp up to that by 'twenty 3.
So the investments are phased over time on we can continue to monitor the marketplace and any other developments that are relevant there is some early.
Pieces of investment that we'll be funding even as early as this year, but it will be spread over the next couple of years.
Okay, great. Thanks.
Thank you.
Our next question comes from Matthew Boss with Jpmorgan. Please proceed with your question.
Hi, This is Kevin <unk> on for Matt Congrats on a strong quarter.
Thanks Scott.
I just wanted to ask about the boat segment margins.
Again this quarter in the double digits I was wondering if you could maybe.
<unk> quarter.
On the drivers of the boat segment, EBIT margin strength, and how youre thinking about the sustainability of those drivers as we move out on the pandemic environment. Thanks.
Hey, Kevin Thanks for the question.
It's pretty straightforward to be honest it is volume.
Improved volume, which allows for better absorption it is operating more efficiently throughout the facilities.
And at least in the last.
Last couple of quarters. It is a bit of lower discounting environment, given that we do not need to provide support or much support to the.
We're working on order to sell products, but in general it is.
It is certainly those factors the other thing I would mention is the new products that are coming out.
We talked about on the Investor day, 122, new or refreshed products all of those are being designed.
Dealers are manufacturer at a higher margin, but to put them on the products that they are replacing and that's something you've heard from us for years on the Mercury side.
As we rollout new engines, but that same philosophy has now moved to the boat business and the new products coming out are really going to be margin drivers for us.
Great.
Mark it on 1.
1 follow up just on the P&L side.
Could you talk about the long term opportunity for this business now that you're on.
On an avocado I think you've decided on 6 billion Mark here in the U S.
I mean, how best to think about your ability to scale and.
On remaining drivers of opportunity here I just spoke on the U S and globally.
Thanks very much.
Thank you.
Great question, Yes, So I think <unk> was an important.
This addition.
Our portfolio.
Brands that enables us to do a lot of things, but there are plenty of other opportunities.
In that.
Mark.
Marketplace for us to build out our portfolio I would say that as we have noted.
Our advanced systems group currently sells.
About 25% of its products.
Going on to recreational vehicles specialty vehicles.
And the $6 billion is only the marine portion of P&A, So as we.
Become more and more successful in.
For example, installing those advanced battery systems into recreational and specialty.
With the vehicle.
We feel as an.
Our right to win some other areas, albeit specialty vehicle leveraging the same.
On modified systems and technology.
Do we use in marine so I would say that debt.
Our room to run in marine.
Certainly plenty of room to run in marine, but also room to run in adjacent spaces as well.
And Kevin 1 thing just just to.
Put a bow on this 1 thing that we're proving out as the growth of our P&A business and the strength of the aftermarket annuity.
Revenue and earnings at that business provides.
This is going to be approximately $2 billion and still growing organically starting in 'twenty 2.
<unk> is obviously 4 or 5 times larger than it was coming.
Coming out of the downturn in 2008.2009, So just a reminder that the mix of our businesses continue.
To trend positive.
Towards the aftermarket and counter.
Counter cyclical portions of our business.
Great. Thanks, very much guidance.
Thank you.
Our next question comes from Mike Swartz from true. It. Please proceed.
<unk>.
Hey, guys good morning.
Maybe a broader question about how you think about product development.
Launch strategy, maybe portfolio strategy within the boat business just given some of the dynamics we have in the market today with.
Capacity constraints.
And supply chain issues, and just elevated demand and backlogs out into 'twenty..2 I mean, how does that play into your strategy in the near term and maybe longer term.
I think good question Mike.
We always believe that over the long run new product wins.
So.
Yeah.
We are not.
Pausing.
New product introductions.
Not pausing up front.
Product development activities, but because of this somewhat unique situations.
Acceptance, some really exceptional situations, where we just we can get.
So something on 1 of our suppliers.
Can add up a production or.
Our development path.
But but.
In terms of what our intention is as we know in this marketplace new product wins over the long term and we will.
We'll continue to invest or not.
Uh huh.
Intentionally at least.
Cause any of our key programs.
1 of the ways that that we are attracting into attracting new people or people into new boats is by providing new technology by providing new models with content. They can get in the.
Pre owned marketplace.
New form factors new holes you.
Connectivity new solutions.
I think we have to continue to differentiate new product from pure product both from a design on the aesthetic perspective on from a technology content perspective.
And we will continue to do that I'm, particularly excited.
About.
So on the stuff that's coming out very soon.
The 822 from pay day has been.
<unk> has been great. It's really if you look at the way sports market, it's really the value portion of that market.
<unk> been really growing.
And so the ability to put a new product into that marketplace.
<unk> sold out through 2022 has been excellent and we will selectively.
<unk> expanding our portfolio into areas that we think.
We can really make a difference.
So that's essentially on philosophy, new product wins over the long term differentiate new product from pre owned product.
And we will get into more and more white spaces, where we think that.
Net customer base is moving.
Okay wonderful.
Question for Ryan just on.
On some of the commentary around product mix, I guess being with favorable on the back half of the year, you've talked about some of your premium boat brands of extended backlogs you've talked about the launch of the V 12 engine that will pick up pace here in the back half of the year. So.
What exactly is weighing on product mix is it just oh, yes just.
The OEM mix within the engine business.
Yeah, It's really 2 things Mike it's the.
The way the forecast looks for the rest of the year, our core OEM customers.
Look to be getting more percentage of the engine and potentially our.
Dealer network or international markets, which tend to be a little bit richer in terms of margin.
And then just as a company overall.
Our boat business continues to be a.
Kind of a consistent chunk of the of the revenue and earnings in as PNA exhibit a.
A little bit more normal seasonality really in the fourth quarter, that's just kind of.
Mix headwind, but again. These are this is a growth story, even in the second half we're comping against the best second half that the company ever had last year and we're still growing top line and earnings. So we wanted to give a little bit more detail.
<unk> around it but it's still a very positive story.
Trending into 'twenty, 2 which again, we feel is going to be another fantastic year.
All right. Thanks, that's it from me.
Thanks, Mike.
Thank you.
Our next question comes from Joe off the Belo with Raymond James.
Please proceed with your question.
Thanks, Hey, guys good morning.
First question wanted to kind of delve into your industry outlook would you revise today hi.
High singles for the year and I think based on the first half it implies.
Roughly flattish industry retail on the second half.
Is that a little bit aggressive given.
Given the tougher compares that we'll be facing as well as the inventory situation since it seems like supply is.
The bigger issue rather than demand right now.
Yeah, Hey, Joe that's that's how the numbers are shaking out I mean a.
The very strong first half.
Your math is Ryan kind of a.
Cash back half, which is a flat to a very strong back half obviously last year on a post COVID-19, but again you know our retail sales are up just from boats, leaving the facility from 40% of our boat, leaving our facilities are retail sold which is continuing to buoy that number and keep.
Flat keep it where we think it's got a land.
But yes, that's exactly the thought process, we do we also do.
We would expect to build some weeks on hand from now through the end of the year as I mentioned, we're at 9 right now.
Hope to be in.
Kind of low to.
So we are building inventory through a part of the season, obviously, where the demand naturally seasonally drops.
So trying to get the right balance is a bit tricky because we think it's going to end up in the high singles.
Okay, great just shifting over to outboards on your market share gains there.
Obviously very impressive.
Now.
It does sound like we could see additional capacity or additional supply should say from from your largest competitor coming in the next few weeks might that impact or have an impact on the pace of your share gains in the second half.
Well I think.
If you look at our.
What we just described when we talk about share gains were really talking about OEM share gains mostly.
And.
We're continuing to drive those forward and make sure that we prioritize our on our Oems.
A lot of the.
The share gains that we're seeing from Oems that we already signed up so we have commitments from Oems I would say that.
And.
In contrast to the.
Some of our competitors.
Who.
Who have come out and said they are not adding more capacity.
We have come out and said we are adding more capacity.
And I think if you're on OEM looking to the future of your business in a growth environment you would want to go with the person who says they're going to add capacity and has demonstrated that it can.
They do.
So I think we have a very strong.
We have very strong momentum.
And.
I think that our story around capacity and product is very compelling and will lead to continued share gains.
Okay, great. Thanks again.
Thanks, Joe.
Thank you.
Ladies and gentlemen that is all the time, we have today for questions. At this time, we would like to turn the call back to Dave for some concluding remarks.
Yeah.
Okay.
Thank you all very much for joining us I really appreciate it.
We're very excited about.
Turning very strong operational and financial performance of the business.
Obviously, we will continue to work hard with our supply chain partners to make sure that we continue to mitigate issues, including things like Covid and the Delta variance.
We're also very excited about the significant early proof.
Points, so we've been able to establish on our next wave in Acis strategies.
It's going to be a busy second half will be welcoming probably 2000 employees from.
Navigate to the Brunswick team when we close the deal later this year and look forward very much to delivering on the synergies and opportunities.
Between our 2 businesses. So we'll look out for more strong performance look out for some more exciting developments as we work our way through the next quarter.
You're all very very much.
Ladies and gentlemen. This concludes today's webcast you may now disconnect your lines at this time thank.
Thank you for your.
Participation in <unk>.
Have a great day.