Q3 2021 Brunswick Corp Earnings Call
Good morning, and welcome to Brunswick Corporation's third 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 Brett Brett Dahl, Vice President Investor Relations.
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. 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 for.
For details on the factors to consider please refer to our recent SEC filings and today's press release all of these documents are available on our website at Brunswick Dotcom.
During our presentation, we will be referring to certain non-GAAP financial information reckon.
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, Brian and good morning, everyone.
All businesses had another outstanding quarter.
We've now delivered our fifth consecutive quarterly record for adjusted operating earnings and EPS.
As a result of our robust operational performance successful mitigation of supply chain challenges and active management of overall cost inflation throughout the enterprise.
Yeah.
Despite challenging comparisons to last year retail demand for our products remains extremely healthy.
We continue to take market share without Mercury outboard engines, many of our boat brands.
In addition, freedom boat club continues to grow its membership base as we rapidly expand this very successful and synergistic shed access participation model.
Robust retail demand for our products has driven field inventory to the lowest level in decades.
Just over 10 weeks on hand.
We continue to increase production to meet demand across all businesses, but when some cases supply chain constraints are limiting our ability to overdrive our production plan.
As we close out 2021, we're focused on elevating production levels to meet demand and refill field inventory during the retail off season.
Integrating <unk> and other acquisitions.
Progressing our strategic initiatives and closing the most successful year in Brunswick's history, while laying the groundwork for the next wave of success in 2022.
Our businesses are focused on closing out another year of robust earnings and shareholder returns with strong margin growth and substantial free cash flow generation, resulting from our outstanding operational performance and a healthy marine market.
And we have increased our 2021 guidance accordingly.
Before we discuss the results for the quarter I wanted to share with you just a few of the awards and award nominations. The Brunswick received during the third quarter.
For the second time in three years Brunswick, a mercury Marine would jointly presented with the soundings trade only most innovative Marine Company award at the IBEX Tradeshow in Tampa last month.
The panel of judges praised Brunswick, a mercury for a record setting 2021 filled with multiple industry changing product launches such as the V 12, 600 horsepower Corrado outboard engine.
And the sea Ray $3 70, Sundance amongst others.
Additionally, Brunswick, a mercury were commended for committing to the health and safety of our employees.
And for our extraordinary athletes to continue meeting customer demand during the global pandemic.
Brunswick has also been recognized for the second consecutive year by Forbes and statistic.
That's one of the world's best employers.
Of the thousands of companies eligible for this recognition Brunswick was one of only 750 companies selected to receive the award.
Ranking in the top 10 companies in the world within the engineering and manufacturing category.
Brunswick is also thrilled to be nominated for several other major awards, including a consumer electronic show Best of Innovation Award.
Five step ahead awards recognizing women in manufacturing.
Five Dame product design awards from bats trade three.
Three international Best of boats awards to European power, but the year awards and two <unk> bulk billed rewards.
Our commitment to democratizing and diversifying boating and the boating industry is central to our strategy and vital to ensuring access to talent and to the continued growth of our customer base.
In past quarters, we provided updated demographic trends and insights around first time on recurring bulk buyers as well as demographic changes.
I am pleased that we are not seeing any pullback in the encouraging trends we experienced during 2020.
We're also continuing to see freedom, leading the way with these demographic shifts.
Since 2019 freedom has seen notable increases in the ethnic diversity of our members, which grew from around 10% in 2019% to 15% now.
And the percentage of women, making up our total member base, which grew by 130 basis points to 35%.
Also of particular note the percentage of Hispanic freedom members almost doubled to eight 4% in 2021 from four 7% in 2018.
We're very encouraged by these trends that will help secure a healthy future for Brunswick and the entire marine industry.
Yeah.
I'd also like to share with you some consumer insights gained through the polling of Brunswick's ripple online both community, which includes both new and seasoned boaters.
Of those surveyed approximately 60% work remotely at least partially.
And 44% of those polled because being able to fit boating into their workweek. This season with more than 20% actually working from that boat at some time.
Most people who fit bolting into that work week during 2021 expect to continue doing so during 2022.
Which further supports our belief that persistent changes in the way people work, we'll provide more opportunities for people to get out on the water and maintained boat usage at elevated levels versus pre pandemic.
I'll now provide some third quarter highlights on our segments and the overall marine market.
Our propulsion business delivered another quarter of significant topline and earnings growth with more favorable customer mix, leading to stronger margins than anticipated.
Over the last two years Mercury has gained an extraordinary 310 basis points of U S retail market share.
With outsized gains and higher horsepower products, where a significant amount of investment has been made in recent years.
Additionally, demand for the new <unk> 600 horsepower auto engine has been exceptionally strong and we.
We've already delivered product to 'twenty four different Oems.
Outstanding execution robust aftermarket demand driven by elevated boating participation and.
And favorable late season and weather conditions in many areas resulted in our parts and accessories businesses over driving expectations in the quarter.
In addition, our advanced systems group announced the tuck in acquisitions of rely on battery and see Medtronic during the third quarter.
To further complement its existing portfolio of lithium ion batteries and to vertically integrate complex electrical wiring harnesses respectively.
These acquisitions, along with the closing of the <unk> acquisition earlier. This month, we will further strengthen our enterprise wide acis strategy and enhance our ability to provide complete innovative digital solutions to consumers.
Comprehensive integrated systems offerings to our OEM customers.
Finally, our boat business continues to deliver strong topline growth in a disrupted environment.
Despite supply chain challenges cost inflation and labor tightness at our suppliers and some of our own facilities. During the quarter, we anticipate annual unit production of greater than 95% of our original production plan for the year with.
With shortages and delays primarily constraining additional upside by.
By comparison, our propulsion business is anticipated to produce approximately 110%.
Its original 2021 production schedule.
Finally freedom boat club continues to expand rapidly, while attracting a young and diverse customer base.
Freedom is now approaching 320 global locations from 47000 memberships network wide with more than 4000 boats in its overall fleet, including an increasing percentage of Brunswick boats and engines.
Next I'd 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 both 2020, and 2019, except for Asia Pacific, which saw sales normalize slightly in the third quarter, but still up 26% versus the same period in 2019.
Domestic sales grew 14% with international sales up 17% versus the prior year.
This table provides more color on the recent performance of the U S Marine retail market comparing the first nine months of 2021 to the same periods in 2020 in 2019.
The year has played out largely as we expected with easy comparisons through the first portion of the year, primarily due to the impact of Covid in 2020 or more difficult comps beginning in may.
Since our July earnings call. The industry has experienced more pronounced supply chain disruptions than anyone anticipated.
Which together with a more direct impact of the Delta variant has led to a more significantly inventory constrained retail environments.
The result is a reported 8% decline in main powerboat retail unit sales year to date when compared with the same period in 2020.
But still 3% greater than the same period in 2019.
Brunswick's year to date performance is generally somewhat ahead of the overall market with outsized market share gains in aluminum products.
Outboard engine unit registrations were down 6% through the first nine months of 2021, when compared with the same period in 2020 with Mercury outperforming the industry.
Mercury's outboard engine unit registrations compared with the same period in 2019 up more than double the industry's market growth rate.
Resulting in a significant market share gains we've experienced in recent years.
It's important to note that all indications are that retail declines are being driven by product availability and are not a result of declining consumer demand.
U S lead generation dealer sentiment and other leading indicators all remain very positive.
For example, all of our 2022 model year, and 80% about 2022 calendar year production slots are already sold out and.
And we continue to see a significant percentage of boats, leaving our manufacturing facilities already retail sold.
All these factors give us high confidence in the continuing retail strength as we enter 2022.
This slide provides some perspective on the impact of inflation on our businesses.
With our ability to take price increases to mitigate the net impact.
Based on our early view of price inflation in the third quarter, we implemented higher than normal annual price increases in July to mitigate the anticipated levels of input cost inflation in the back half of the year.
However, input cost inflation has exceeded our estimates so we've implemented additional price increases during October and both our propulsion in both businesses to ensure that we cover inflation with pricing on a full year basis.
Between direct materials labor and freight we anticipate input cost deflation to be in the high single digit percent range versus 2020 on a run rate basis.
With a significant majority of the impact felt in the second half of the year.
Consequently, we may need to take further mid cycle increases.
Our higher than normal increases in 2022.
Although we believe the price increases we've implemented to date are generally at the lower end of those implemented across the industry and are not impacting raw demand.
I'll now turn the call over to Ryan for additional comments on our financial performance.
Thanks, Dave and good morning, everyone.
Our businesses delivered another outstanding quarter.
When compared with 2023rd quarter net sales were up 16% with adjusted operating margins of 15, 5%.
Operating earnings on an as adjusted basis increased by 9% and adjusted EPS was $2 seven.
Once again setting new all time highs for any third quarter for which we have available records.
Sales in each segment benefited from increased volume due to strong global demand for marine products.
<unk> share gains and increased pricing.
With earnings positively impacted by increased sales and favorable changes in foreign currency exchange rates, partially offset by increased input costs and increased spending on sales marketing and aces and other growth initiatives.
First nine months comparisons are also very favorable with 2021 net sales up 39% when compared with the first nine months of 2020 and adjusted operating margins of 16 at a 5% a 290 basis point improvement from 2020.
This resulted in adjusted EPS for the first nine months of $6 82 and.
At a very robust operating leverage up 24%.
We have generated almost $300 million of free cash flow during the first nine months of the year, which is a strong result, considering the incremental working capital needed to satisfy increased needs for inventory as we elevate production levels.
And the $60 million increase in capital spending when compared to the same prior year period.
Turning to our segment revenue in the propulsion business increased 19% versus the third quarter of 2020 and was up 58% versus Q3 of 2019.
Strong demand for all product categories together with market share gains drove higher sales, which continued to be enabled by increased production levels.
Operating margins were flat versus 2020, but up 320 basis points versus Q3 of 2019 as pricing favorable absorption and benefits from more favorable sales mix, we're able to offset higher manufacturing costs, primarily caused by material inflation.
Yes.
And our parts and accessories segment revenues increased 7% and adjusted operating earnings were up 2% versus the third quarter of 2020.
Adjusted operating margins of 22, 2% or down 120 basis points, when compared with the prior year quarter and were negatively impacted by the closure of a key manufacturing and distribution location in New Zealand for a significant portion of the quarter due to national Covid Lockdowns.
As well as increased spending on growth related investments.
Favorable late season weather in many regions is allowing for increased boating participation, which should continue to drive aftermarket sales in Q4 and into 2022.
In our boat segment sales were up 22% and adjusted operating margins were down 230 basis points to six 9% when compared with the third quarter of 2020.
When compared to the third quarter of 2019 sales were up 45% and adjusted operating margins were up 240 basis points.
Sales increased in all product categories, with particular strength in aluminum freshwater including our pontoon businesses.
Increased sales volume and pricing together with lower retail discount levels versus prior year were offset by material inflation higher costs due to manufacturing inefficiencies and increased spending on growth initiatives, resulting in slightly lower segment operating earnings.
Freedom Boat club, which is included in <unk> acceleration contributed approximately 3% of the segment's revenue at a margin profile that continues to be accretive to the segment.
Turning to pipelines as Dave mentioned earlier, we believe our BOE production will reach at least 95% attainment of our original production plan for 2021.
A remarkable achievement given the current supply constrained environment, we're working in.
Supply chain challenges, including delays in receiving certain components has resulted in the deferral of shipping certain nearly completed boats to subsequent quarters.
As a result, we wholesale sold approximately 8200 boats during the third quarter.
Which is roughly the same number of units sold at retail and 16% greater than the number of units wholesale sold in the third quarter of 2020.
This keeps dealer inventories at an all time low of approximately 7400 units.
Our boat brands ended September with just over 10 weeks of boats on hand measured on a trailing 12 month basis with units in the field lower by 27% versus the same time last year.
Yes.
As we head into the fourth quarter, our businesses are focused on closing out another year of robust earnings and shareholder returns with strong margin growth and substantial free cash flow generation, resulting from our outstanding operating performance and a healthy marine market.
Although we continued navigating certain headwinds, including elevated supply chain labor and transportation costs and challenges. We are confident that we can continue to drive growth and innovation as the clear leader in our industry.
Now, including the projected benefits from our closed acquisitions, including the acquisition of <unk>, we are providing the following updated guidance for full year 2021.
We anticipate the U S marine industry retail unit demand for the full year to improve from reported year to date levels ending at close to flat versus 2020.
Net sales of approximately $5 8 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 $425 million.
And adjusted diluted EPS of approximately $8 15, which represents a 61% increase over 2020.
Note that we believe acquisitions will contribute about 10% of the fourth quarter's revenue growth, but we'll be neutral on EPS after including the impact of additional interest cost related to the financing of the <unk> transaction.
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 favorability related to foreign branch income and certain state tax law changes. We now believe our effective tax rate for 2021 will be approximately 21, 5%, which is slightly lower than our estimate from the July call.
We have also updated our guidance associated with working capital and intangible amortization associated with our completed acquisitions.
Similarly, our capital strategy assumptions have not materially changed with the execution of the financing for the <unk> transaction, creating a slightly higher interest expense for the year with approximately $25 million of additional debt retired as a result of the tendering of our 2023.
And 2027 notes during the financing process.
We anticipate ending the year with debt leverage of one seven times on a gross basis and below one five times on a net basis.
Additionally, our $43 million of share repurchases in the third quarter brings our total share repurchases for the year to just shy of $100 million.
We have adjusted our guidance to show that we anticipate reaching approximately $120 million worth of share repurchases by the end of the year.
I will now turn the call back over to Dave to continue our outlook comments.
Thanks Ryan.
Solid operational execution by our businesses has us squarely on track to deliver an outstanding 2021 as.
As we execute against the operating and strategic priorities, we've discussed throughout the year.
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 and industry, leading propulsion solutions that we project will enable topline in earnings growth far into the future.
Our accelerated incremental capacity projects remain on track for completion by the second half of 2022 and.
And we believe will allow us to gain additional customers.
Already expressed their interest in being supplied by Mercury.
Our parts and accessories segment remains focused on optimizing its global operating model to leverage its distribution and position of strength and areas of battery technology digital systems and connected products in support of our <unk> strategy.
We are keenly focused on our thoughtful acquisition integration activities with <unk> rely on and see Medtronic.
And we will continue to focus M&A activity and higher technology systems, and parts and accessories businesses.
We review opportunities to further build out this increasingly large high margin recurring revenue portion of our business.
The boat segment will continue to focus on launching new products executing significant capital expansion plans, increasing its efforts to become more vertically integrated to help mitigate future supply chain issues and refilling pipelines and the very robust retail environment.
Freedom also continues to expand its footprint with the recent acquisition of the Connecticut territory, which has seven locations and over 600 memberships.
Combined with the purchase of the New York Territory earlier. This year, we can now take advantage of costs and other synergies in the northeast U S region.
And can more quickly expand the number of locations.
Before we close out our comments. This morning I wanted to leave you with a few more updates.
We've already begun to see positive early returns from the completed advanced systems group deals with rely on winning new business from significant OEM and retail distribution customers.
In addition to the Connecticut acquisition early in the fourth quarter Freedom Boat Club continued its international expansion plans with the acquisition of phonetic club in Spain during the third quarter.
We believe that our pace and rapidly expanding these future oriented recurring revenue businesses will further distances from potential competition.
As most of you are aware, we're also beginning to see the resumption of in first in boat shows like the Fort Lauderdale boat show that kicked off yesterday.
And early in September we participated in the can boat show.
The most important European events for our brands.
The feedback it can from our channel partners and end consumers on the new <unk> 600 horsepower Geraldo and a new boat models was extremely positive.
Mercury reported double the number of outboard engines at this show than its closest competitor and significantly more outboards on display than all other manufacturers combined.
CRA also reported a 65% increase in its revenue versus the 2019 show while all other Brunswick brands on display reported strong consumer interest in sales.
We have continued to launch new products at a rapid pace across the enterprise.
On the sustainability front, we also reached another important milestone during the third quarter.
With the land and sea Kellogg Marine distribution operation, becoming the third proms with location to achieve a zero waste to landfill designation.
And Mercury, One and association of Energy Engineers Award.
Uli installed solar array in Wisconsin.
We are working to further expand our sustainability initiatives and we will share more on this subject early next year.
Finally, I want to once again offer a heartfelt thanks to our global employee population for all their dedication efforts and sacrifices during what is still a challenging time with some of 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 will now open the line for questions.
Thank you.
And ladies and gentlemen at this time, we will be conducting a question and answer session.
If you would like to ask a question. Please press star one on your telephone keypad.
Confirmation tone will indicate your line is in the question queue you.
You May press the Star key followed by our number two if you would like to remove your question from the queue.
For participants using speaker equipment, it may be necessary to pickup your handset before pressing the star keys.
One moment, please while we poll for questions.
Our first question comes from Matthew Boss with Jpmorgan. Please state your question.
Hi, Good morning, guys. This is Kevin Heenan on for Matt Congrats on a strong quarter.
Thanks, Kevin.
So I just wanted to ask on the U S retail market. If you could elaborate on your confidence in the outlook provided today in.
In regard to the improvement to flat for the year relative to the down 10% for the total industry year to date or 8% for the Powerboats.
And how you're thinking about retail demand as we move into 2022.
Yes, Thanks, Kevin obviously, it's an unusual year.
A lot of thought going into this we're comping off the 8% Ssi.
Our internal retail is not showing down that far you typically we see our internal estimates and Ssi converge as we go forward and we've seen some recent.
Improving revisions from Ssi.
So what we're trying to do is triangulate we've also seen.
From our perspective internal retail improving again in October so.
The trajectory shows is closer to flat up in up or down of bids than current Ssi shows and I think ssi will reflect some improving trends, but there'll be some lag again.
As we see kind of forward looking revisions across the end of the year.
There are some kind of.
Plus or minus dynamics, a few like there'll be some dealers who want to hold any retail inventory they have in their showrooms because at the moment a lot of them have nothing.
So that would be.
May not be inclined to register the retail sale, but others, who are more interested in getting cash through the end of the year will be inclined to register the retail sale also various companies have different incentives to to register retail sales. So we're trying to take into account those plus or minuses.
The slight revisions, our internal retail and the general trends through September and early October.
And then 2022 I think 2022.
We're clearly seeing is incredibly strong raw demand.
We just looked at the <unk>.
Happened to look at the first day of Fort Lauderdale.
Boston Whaler retail for the first day was up more than 50%.
There is no question versus last year's first day of the show So Theres no question that people.
Really one thing boats.
We expect retail to improve in 2022.
As supply chains begin to stabilize.
And some of the more acute issues that we were experiencing in Q3 and late Q2 begin to alleviate.
So we still expect growth in retail in 2022.
But it will certainly depend on how much the given the light inventory levels. It will depend on how much deeper how.
How much the industry can produce.
Great.
Thanks very much.
Thanks Scott.
Our next question comes from Sean <unk> with Exane BNP Paribas. Please go ahead with your question.
Hi, guys. Thanks for the question maybe to start you know Theres, obviously, a lot of talk about retail sales, but maybe can you elaborate on how the businesses.
A little less tied to sales retail sales now PNA getting bigger freedom boat club market share gain.
So maybe you don't need as much retail sales growth to be successful.
Can you maybe elaborate on that on laptop.
Sure I think it's a.
Great point and thank you for raising it certainly.
You are seeing in our propulsion business that market share gains are even trumping overall market growth really as a source of.
Unit, if you think about the fact that in the third quarter.
Our propulsion.
Revenues were up 60% I think versus 2019.
So that part of the business is growing massively ahead of market.
So you're absolutely right.
And then of course, our increasingly large P&A segment depends on usage and we have seen.
These usage trends improve every boat that goes in the water now as more and more of our P&A and systems and technologies on it. So we're enriching the fleet if you like with the PNA overtime and usage profiles has been very strong and one of the slides. We included was that slide after we pulled up.
Our ripple online community, but the number of people who are bolting during the week now not just that we can so usage profile is improving.
Seasons have been expanding.
We will extend again this year and then of course, we have freedom boat club, which doesn't dependent all along.
New boat sales.
<unk> is another part of our recurring revenue as we add new businesses through inorganic growth into both of those areas into P&A.
Obviously huge.
A hugely increased in revenue and earnings from <unk> and some of the other recent acquisitions.
And as we acquire more territories for freedom.
That exposure, if you like to new boat sales as gets lower and lower.
Yes, just to add I mean by the time, we close out 2021 and look into 'twenty two almost half of our earnings are going to be comprised of the aftermarket P&A business Freedom boat club and the Repower business. So the reoccurring countercyclical businesses that we've been growing it.
They've said so that that's a number that should stick into people's minds, because that is a focus of where we're spending our investment dollars.
Okay. Thanks, and then on the supply chain Theres, obviously been a lot of talk about supply chain tightness.
<unk> is on that front, but you guys were able to do 110% of the original plan for propulsion and then.
95, plus for boats I guess, what what makes the supply chain your supply chain and Alan.
Have you been able to navigate it.
I think on the propulsion side with Mercury, it's the level of vertical integration that really helps us and the fact that we produce.
A lot of our product domestically and sell it domestically where the only out.
Board manufacturer producing product in the U S.
So and Thats, mostly get sales so our exposure to.
Freight and shipping and other things for on the engine side is correspondingly.
A lower than some of our competitors and then if I have said many times you guys are welcome to visit the Mercury plan, it's an amazing place youll see crushed aluminum call wheels going into <unk> and outboard coming out of the other that's how vertically integrated it is so I think that fundamentally reduces its exposure.
And then we have great supply chain teams with a lot of global reach to collaborate to make sure that.
Across our enterprise, we understand what levers we can pull we have engineering teams that are able to re qualified things.
So I think the combination of scale global scale vertical integration.
And a lot of great work by our supply chain teams and our engineering teams.
Makes us somewhat more resilient than some of the other people in the sector probably.
And we will continue to capitalize on those.
Those advantages as we move forward.
Certainly we are.
Part of our strategy is to vertically integrate more.
Especially on those items that might be more exposed to supply chain disruption. So as we go forward, we will hopefully be hope.
Hopefully the situation will improve overall, but our exposure to it will reduce over time.
Thank you. Our next question comes from Mike Swartz with Truest. Please go ahead with your question.
Hey, guys good morning.
I just wanted to take.
Just wanted to talk a little about maybe maybe pricing and I think you as well as everyone else.
We're taking some mid mid cycle pricing this fall.
But maybe talk about the strategy and how maybe you are protecting to the degree that you're protecting your backlogs in retail sold orders with that pricing going through.
Yes, Hi, Mike.
I think.
It's fair to say that because of the amount of our products that we wholesale that are already resale retail sold at the moment, we are doing a lot less price protecting then we might do in other circumstances.
So.
We have.
Kind of reach some understandings and I think with our channel partners.
There will be pricing changes more frequently.
And the extent to which we can protect is limited.
So.
Fortunately I think their understanding.
But we are making sure that.
Those.
Price increases.
So for example, we might in some circumstances.
Only protect.
A price increase or price level for a quarter and then it flows it flows through sometimes we won't even protect for a quarter. So it's a little bit more dynamic at the moment because of that issue with the amount of wholesale it is retailed.
We're doing a lot less price protecting than we would normally do.
Okay, great. Thank you for that and then another another question just in the.
The slide in the presentation, just regarding kind of the cost price dynamic in the next quarter. So I'm just wondering does that embed any.
The real change in boat mix for the fourth quarter I think looking at third quarter. It looks like a little heavier towards your freshwater business should we expect that to continue in the fourth quarter as well.
I don't think that we're anticipating that particularly.
I think some of it is what is the supply chain dynamics some of those larger saltwater boats at a little bit more complicated so.
They will tend to be hung up a bit longer with some of the supply chain issues, but other than that I don't.
I think so.
I do think.
And it kind of connected way as we look through Q3.
We are at the moment, we have quite a lot of.
Supplied.
Thats up cost if you like associated with some of the capacity expansions that we're doing.
We're bringing we've just brought.
The additional Boston whaler plant online we're bringing.
Portugal online for capacity expansion, but we're not seeing.
Yet a lot of volume flow out of that but we are incurring operating costs. So some of the capacity expansion will start to change the dynamics as soon as Q4.
And I don't think we're looking for a material shift no we're not and Mike maybe the other piece of the equation is just overall margin profile, we would expect margins in the Q and Q4 to be better than Q3 for the boat business for the reasons. Dave mentioned they May still trail last Q4, which was a really really outstanding quarter and didn't have any of the supply.
Chain issues or inflation that we're dealing with but we would we would anticipate growth from sequentially from Q3 to Q4.
Okay, great. Thanks for the color guys.
Our next question comes from Joe <unk> with Raymond James Please state your question.
Hey, guys. Good morning, I guess I'll just follow up your last comment you made Ryan about margins.
Margins getting better sequentially.
Does that mean that the margin pressures that youre seeing have peaked here or do you think they could possibly get worse in the first half of next year.
Obviously, Joe and thanks for the question, it's obviously tough to tell.
This early.
I think we've got a lot of we've got a lot of things that are helping us in terms of being able to produce more units.
As we continue to get the capacity on board that Dave talked about.
So we still think there'll be margin growth next year in 'twenty two versus 21.
The timing of that probably will be a little bit lumpy, just because of the comps and.
The weighting of the supply chain issues, which obviously if anybody tried to take a guess on when that's going to happen. We would all be just doing that just guessing.
But I would I would anticipate margin growth next year in the boat business.
Just wanted to follow up with John comment I mean, this is Q3 was particularly acute for us in terms of a lot of startup costs for the big New Boston Whaler facility for the Portugal facility with really limited production.
In fact, no production coming out of the newer part of the budget.
Chicken facility yet.
Limited units coming out of <unk>, so as those come online, particularly the new Boston whaler facility in Q4.
We will get better absorption, we are seeing as well I think some mitigation of some commodity costs I think steel is down significantly. This month aluminum is down this month, so we're hoping that.
Some of those trends will continue but we do as.
As I mentioned have flexibility on pricing.
Sure.
If we need to execute on it. We've previously said, we try and take a long term view with us.
But we're going to cover it over time.
But we obviously are very interested in making sure that product affordable affordability is maintained.
Understood maybe just a follow up the next year you guys talked about.
$9 EPS number give or take in the past is that still your thinking at this point or has the supply chain issues impacted that at all.
No we didn't we didn't make any additional comments on it and in this particular earnings call. We will early next year I would say thats.
There is no scenario, we currently foresee there will be lower than that.
So.
I think you should regard that as a good base for.
For where we're going.
Great. Thanks, guys.
Our next question comes from James Hardiman with Wedbush Securities. Please go ahead with your question.
Hey, good morning.
<unk>.
We used to always do these sort of bridges between the industry growth number that you guys were looking for in your own.
Sales, maybe that would be a good exercise here.
Not only is it a big gap.
You downgraded your industry outlook pretty meaningfully.
And your sales outlook it seems like at least on an organic basis is unchanged maybe help us figure out how you. How you were able to accomplish a few things at the same time.
Yeah, Hi, James I don't know if I can fully appreciate for you I'll be honest I would say that our internal retail is tracking ahead of Ssi.
By an Ssi recently has generally revised up.
Numbers.
As it.
Kind of move through the year and probably now as it moves into 2022.
I do think we have dealers that are very busy doing a lot of stuff and not necessarily registering boats and so that will that will catch up over time.
We have gained some market share.
But we don't think thats enough to bridge the difference, it's some of it but not all of it.
And so we have to wait to be honest little and see what happens with the Ssi.
Going forward.
So we can bridge a bit with market share I think we can look at our internal retail we know what that is.
We just don't think that market share gains covering.
All of it we certainly did as you said change our view of the.
The U S market retail.
Based on just a lack of.
Available product, which we didn't imagine would be such.
Such an issue with sales.
In Q3.
So yes, you are correct, we certainly revise that but I would say internal retail is continuing to show more positive Vanessa side.
Is it safe to say that.
Maybe.
How you guys are getting to your numbers are a little bit lighter on units and a little bit heavier on an ASP at this point just given the supply chain challenges and what that does from a pricing perspective.
Well, yes, I think.
As we mentioned just a unit basis.
We will likely finish the year above.
95% of our initially planned production.
And probably on the engine side, 110% or more so there isn't a huge bridge for us in terms of I mean, obviously asps are going up but.
I don't think that's a massive difference.
Okay and then my second question so you.
Wholesale 8200 units.
In the third quarter I think the number you gave us in the second quarter was 9400 should we just read that as.
That is the supply chain impact on your production.
How should I think about that going forward. Thank.
Thank you said that.
The the units that went into I guess corporate inventory right. The unfinished units do you expect to release all of those in the fourth quarter or does that.
Does that hangover work its way into into into 2022.
So I think on the first part there is a natural reduction between Q2 and Q3 thats not just supply chain disruption essentially we take some.
Downtime in July what we do.
New model launch changeovers, and so we essentially make ourselves less efficient in Q3 by changing over model lines and most of that occurs in July.
So that and then there are we.
We have fewer production days because of.
Because of holidays, so I would say that some of that difference is the supply chain and some of it is natural.
I think.
Bulk group will.
If I recall launch AC either new or upgraded models this year in 2021.
So the impact of those changes going through the system, mostly in July as part of that difference.
And then I'm sorry.
We still have units EBITDA unfinished.
Obviously, we'll be doing our best to.
Get those out the door I would say, it's probably likely that at the end of the year, we'll still have some units that are.
The.
In that situation, although I would say.
Obviously, we will be making.
Doing everything we possibly can the demand is really high.
I said in another meeting it doesn't matter if the boat has a thousand parts are 10 plasma pause if youre minus one path and then the same effect.
So the boats that tend to get hung up on the other.
More complicated boats and obviously, we want those out the door. So we will be doing everything we can but it's realistic to assume we won't get everything out.
Got it very helpful. Thanks.
Thanks James.
Our next question comes from Fred Wightman with Wolfe Research. Please state your question.
Hey, guys. Good morning, you had talked about some expected mix headwinds on the propulsion side of the business in the back half of the year. It sounded like that came in better than expected here in the third quarter I was hoping you could touch on where you saw the disconnect and whether or not we should expect sort of a catch up here in the fourth quarter.
Okay.
Yes, I think we have our dynamic song.
Mix in the propulsion business depend a lot on whether we're supplying to large Oems smaller Oems dealer channel International you saw that international growth was pretty strong and so the mix there is good.
You saw that we're gaining share in saltwater so those I think are pretty set.
Circular.
We saw very strong demand for repower as well and in this quarter I think it will fluctuate a bit over time.
As the dynamics of supplying Oems and others changes, but generally it's on a secular.
Growth path over time.
As as Mercury it continues to be the propulsion of choice.
Obviously, we are able to price for that.
<unk> technology, so generally it will continue to improve but.
But we will see some dynamics over time.
Okay, and then you had made a comment about favorable weather as a tailwind on the aftermarket side into the fourth quarter I know that Thats always an area, where there is a fair amount of seasonality. It's also going to be some noise from Napa co. But can you just sort of help us think about the sequential seasonality from <unk> and the <unk> for that business this year versus what.
We might see in a normal year.
Yes, Fred this is Ryan P&A.
<unk> obviously.
Changes based on usage of the product I think what we saw certainly in the Midwest was a pretty nice.
September and October and that leaves boats on the water is a little longer and pushes some sales some service into into the winter months. We saw very similar track last year with a good fall and therefore, PNA pretty strong and Q.
Q4, and even Q1, so I think we've embedded that into our into our guidance, but it is a little bit of favorability.
As we as we close out the year.
Thank you and our next question comes from Anna <unk> with Jefferies. Please state your question.
Hi, Thanks for taking my question, it's nice to hear that <unk> taken so far. Thank you has not impacted the norm as we think about 2022 and contemplating further action I guess, let's stop that you have in place now.
Sure that alarm.
Yes so.
So good question I think we've consistently said that we are trying to balance mitigating inflation with a long term view of the market and making sure we get new people into the marketplace, which we've been very successful at and keep people in boating.
So I think what you've seen us take a very.
It's modulate our pricing.
To make sure we don't get too far ahead of inflation. It would have been easy to take a large.
Chunk of pricing in the middle of this year and try and get ahead of everything but of course.
Risks.
Either losing share or losing buyers in the market as a whole. So we've reached agreements with our channel partners around how we will approach price increases.
We will be.
Making sure that we continue to balance.
Maintaining affordability with with covering inflation.
Okay.
Thanks.
Thank you. Our next question comes from Craig Kennison with Baird. Please state your question.
Yes. Thanks.
So just to stay on trend I am committed to working from my board at least once next season.
Yeah.
Thanks for the laughing.
So I guess the question.
As an avocado and I'm wondering if you've had conversations with.
Some of your OEM partners and what's the receptivity might be too.
A more integrated solution as you bring in.
All of those.
Accessories and components to the OEM partners.
Yeah, Thanks, Craig I think.
The reception of our acquisition of <unk> to our acquisition of <unk> has been very strong from all of <unk> customers.
Brunswick customers too so I think they all see the opportunity there.
Certainly.
<unk>.
Have been or are being increasingly successful delivering integrated solutions.
Both from the Mercury perspective, and also from the <unk>.
<unk> systems group ASC connect perspective.
Without I can't mention names, but for some Oems we are now on site and the majority integrator of the products.
So.
We are having a significant impact in the marketplace and of course every time, we do that there is an opportunity to introduce more of our expanding product line as we go obviously, we have to balance.
That with making sure that we are flexible as people.
Want to want to continue to select that brands, but certainly that is a favorable opportunity its very favorable opportunity for us.
And as a follow up Brian to you.
With your stock at basically 10 times. The number you hope to reach next year and even the contemplation of a buyback tax that's been announced in recent days, how aggressive could you be in the fourth quarter with respect to your stock.
We can be quite aggressive Craig.
I think most people know that we have a pretty standard.
Buyback formula that we that we look at and as the market cracks and certainly as our stock.
Is severely undervalued as I think we all believe we will be very aggressive in that $120 million number that we put in the deck I certainly can go up from there.
The situation allows.
We have a significant authorization so that's not an issue at all.
Great. Thanks.
Thank you.
And our next question comes from Joe Spak with RBC. Please state your question.
Thanks, Good morning, everyone.
I was curious.
If you have.
Any exposure to some of the.
Magnesium or aluminum shortages I know a lot of that is sort of more China based and I think at least for the U S.
That's probably sourced more locally.
But I know in Europe, they've got a lot of their magnesium from from China, and I believe that's used on boats, especially freshwater for corrosion, but maybe maybe I'm wrong, there and any color you could provide would be helpful.
Yes.
Magnesium into constituent in some of the alloys.
Alloys that we use we have not seen a major impact from it I was pleased to see aluminum price I think down 5% in the last months steel is down 20% and I think in the last month lumber was down a long way so.
Some of those trends.
Moderating we do.
Mercury.
Sure.
A big user of aluminum.
And it's outboard engines.
<unk> does have proprietary formulas.
But also it takes a lot of its product from the recycle the scrap market in fact, almost all of it.
Which tends to be more protected than the Virgin markets.
So I would say that clearly we are seeing some of this that is moderating.
Overexposed to magnesium.
Okay.
And then Brian just.
On your own inventory.
Thats up higher I think you made a comment that you are building some too.
Because you want to be able to build to meet demand.
Is there like a new normal here on how you manage your own working capital.
Given what we've seen happen to supply chains over the past year, where do you want to keep more more parts on hand, and also as your business mix I guess moves a little bit more towards <unk>. It seems like maybe it also keep a little bit more inventory.
Any commentary there would be helpful.
Yes, Joe that's actually a great question and we spent a lot of time on it obviously the inventory number just kind of I'll call it $350 million or so September over September versus last year, but it's all related to exactly the the factors you've laid out primarily PNA inventory that we want to make sure we have on stock.
And ready for the off season as folks are winterized and their boats, it's higher raws and Wes in our facilities. So that we don't get in a short supply situation.
And it's just a little bit of a rebuild from a time and last September where we were frankly under inventoried.
As I look around our business as I have zero concerns about having too much inventory and we may allow a little bit more to be to sit around as we enter the retail season, just so that we're able to maximize our production, but one thing I do want to make very clear is we don't have a whole lot of hardly any.
<unk> finished boats they are sitting at our in our facilities as most people know as soon as those boats are finished they are sold to the dealer and right now 40% of them go right to a customer. So when you see that finished good number kind of a $150 million of very very small percent of that is both to the rest of it is propulsion and.
PMA.
I appreciate it thank you.
Thank you. Our next question comes from Tristan Thomas with BMO capital markets. Please state your question.
Good morning, or afternoon, I guess technically.
I think you've kind of alluded to this before but could you maybe provide context around the price the pricing dealers are taking on top of the pricing you are taking.
Well I think the.
Retail pricing.
<unk> is obviously covering.
The pricing that we provide and then the promotional environment is obviously very favorable I don't think there are many retail discounts around.
At the moment.
So I would say generally that prices are transacting closer to MSRP than they might normally do.
I have not seen.
Certainly examples without channel of.
Kind of predatory pricing gouging or anything I think.
Everybody believes that the right thing here is to make sure we cover our costs.
And.
I'll make sure we keep the consumer in the market.
Okay, and then just one more question.
80% of 2022 calendar year production.
Wholesale sold right so.
So I was just wondering what how many of those have a customer name attached to them.
Okay.
Yes, we've been running in the 30 to 40 percentage range typically of the wholesale so I think thats probably close.
Okay.
Okay, great. Thanks.
Thank you.
Thank you and that concludes today's question and answer session I will now turn the floor back to Mr. Dave Fox for closing remarks. Thank you.
Alright. Thank you very much. Thank you all very much for joining us on the call today. We continue to appreciate your interest in Brunswick, we are very very excited about our very strong operational financial performance.
Our continued strong success and pace and executing on acquisitions. They are continued to be very consistent with our strategy and.
Really reshaping the business for resiliency and future relevance and of course <unk>.
<unk> success with new customers.
With the new acquisitions, we are welcoming the more than 2000, new people into the Brunswick family and they come with skills and experience that is very relevant for the future a lot of software engineers a lot of people in digital.
Positioning us really well for the future I mentioned earlier, it's very early in the Fort Lauderdale boat show, but on the first day. It look very strong initial reports are consistent with recent shows that Mercury has.
Kind of in the mid <unk> percent of total outboards on display.
From what we can tell our brands had a very strong start to the show. So we're excited.
I think that reflects not only on the strength of our brands, particularly mercury in Boston whaler and others, but also on this incredible raw demand that we see propelling the business forward into next year as well.
Thank you all very much.
Thank you. This concludes today's conference all parties may disconnect have a good day.