Q1 2022 Brunswick Corp Earnings Call
Good morning, and welcome to Brunswick Corporation's first quarter 2022 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 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 Guillaume <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 details on the factors to consider please refer to our recent SEC filings and today's press release all.
All of these documents are available on our website at Brunswick Dotcom.
During our presentation, we'll be referring to certain non-GAAP financial information reconciliations of GAAP to non-GAAP financial measures.
Abided in the appendix to this presentation and the reconciliation sections of the unaudited consolidated financial statements accompanying today's results.
I will now turn the call over to Dave.
Yes.
Thanks, Brian and good morning, everyone.
All businesses had a strong start to 2022 delivering record first quarter sales operating earnings and EPS.
Continued focus on operational efficiency and strengthening our supply chain.
And they will increase production levels and our investments in technology innovation recurring revenue businesses and capacity have shaped the enterprise portfolio further success in any economic environment.
Despite the inflationary backdrop the pace of retail sales continues to be dominated by the twin supply side challenges are very low field inventory levels of supply chain disruption.
Global bolt field inventory levels was 6% lower at the end of the first quarter 2022 and at the same time in 2021 down 12% in the U S.
And Ah lightly exaggerated by slowest start to spring in the Northern U S and Canada, which is resulting in delayed deliveries and registrations for many retail sold boats.
The percentage of all boat production, but he's already retail sold continues to be at an all time high.
Early 2022 boat show performance is encouraging and there is no evidence of wholesale or retail cancellations.
Field inventory about larger boats in the U S is currently at or near zero, and consequently that continues to be very little advertising or promotional activity.
With macroeconomic and geopolitical factors driving current financial market dislocation, we took the opportunity to issue long term debt at favorable interest rates and complete 80 million of share repurchases in the first quarter.
Can we increasing our 2020 to annual share repurchase target to 300 million.
Later in the call Ron will provide you with further details behind our updated guidance for 2022.
Before taking a look at our segment performance for the quarter I wanted to spend a few minutes talking about the external factors in airports says we are monitoring and managing some on a daily basis.
Well, it's I'd like to address both the sentiment in the face of the macroeconomic pressures geopolitical issues currently at the forefront of many people's minds.
Our internal surveys continue to indicate that intention to boats and to buy a boat remained essentially unchanged versus 2021.
And that supply side challenges outpacing retail sales.
Clearly all businesses have not been immune to the impacts of the inflationary environments on product cost we.
We take a long term view and our overall strategy has been just to cover all cost of inflation through price increases on a dollar basis.
As you know around 80% of all boats sell for less than $50000 of boats can be financed up to 15 years.
Additionally, despite recent forecast rates increases on a historical basis interest rates remain low.
In terms of both operating costs, we estimate that the average Brunswick boats.
The rise in fuel prices since early 2021 will increase the seasonal fuel bill by less than $200.
Turning to geopolitical events, the tragic culprit flipped in Ukraine, and all cessation of business in Russia, Belarus crime, yet and the disputed territories I said, no significant direct financial supply chain impact to our business.
Oh, the wholesale sales and production growth continues to be constrained most notably now by the supply impact of the China, Lockdowns and associated freight and transportation delays.
And the spring boating season is getting off to a slow start than a year ago, and northern U S and Canadian markets.
We are monitoring long range weather forecasts currently show some improvement in May which should translate into greater boat usage and increased aftermarket P&A sales in the second quarter.
I'll now provide some highlights on the performance of our segments during the first quarter.
Our propulsion business had strong results, but historically first quarter 2021 with top line growth enabled by increased production.
Mercury Marine continues to expand outboard propulsion retail market share gaining 310 basis points in the last 24 months, including over 1000 basis points of share gains in engine. So what 300 horsepower.
Production capacity for high horsepower outboard engines will be significantly increased by the previously announced capacity expansion and the phone to like Wisconsin facility.
It remains on schedule for completion in the fourth quarter of 2022.
Mercury is now delivered to be 12, 600 horsepower Dorado engines, so more than 50 different OEM customers since its unveiling just over a year ago.
Our parts and accessories businesses continued their robust performance collectively delivering the highest ever first quarter revenue, that's both aftermarket and OEM channels prepare for the prime boating season.
Our advanced systems group with the addition of fanatical delivered exceptional top line growth in the quarter with healthy margins. Despite continued supply chain tightness and cost headwinds.
Our boat business posted outstanding top line growth in the quarter with operating margins slightly below double digits and increasing sequentially for the second consecutive quarter.
Our aluminum fishing category had outsized revenue growth and robust operating margins.
L. A recreational fiberglass brands also posted a strong quarter.
We are meeting our production plans for the year despite the headwinds.
Mobile pipeline inventory levels remaining at the very low level of 19 weeks.
Finally freedom boat club has had an incredibly busy start to the year with substantial growth in the U S and Europe .
And now has 350 locations and over 48000 memberships network wide.
Generating exceptionally strong synergy sales across submarine portfolio.
Okay.
Next I'd like to review the sales performance of our business by region on a constant currency basis, excluding acquisitions.
As expected most regions posted substantial sales growth in the quarter versus first quarter 2021 .
With Canada, and Europe , delivering strong sales growth in every business unit.
Overall international sales were up 11% versus the prior year quarter U S sales grew 8%.
Sales in Asia Pacific were also strong when compared against the historical level achieved in Q1, 2021 when that region saw a 31% increase versus first quarter 2020.
As a reminder, the capacity initiatives across the enterprise, but especially in the propulsion segment will allow us to better satisfy the immense international demand and backlog for all products.
As we discussed during our January earnings call the industry experienced more pronounced supply chain disruptions than anticipated in the second half of 2021 with continued strength at retail leading to a more significant inventory constrained retail environment.
As expected this trend continued into the first quarter of 2022.
As mentioned our indicators suggest the reported industry retail declines are being driven by a lack of product.
We viewed the delayed deliveries to end consumers in northern boating market is transitory with deliveries expected to pick up when the weather improves which will be reflected in future reporting.
U S lead generation Dallas Center months, and other leading indicators all remain very positive.
We are essentially sold out about 2022 wholesale production slots with some brands being sold at retail for 2022.
Ryan will provide some additional commentary on this point during his discussion of the pipeline.
Brunswick retail performance in the first quarter was broadly consistent with the overall market performance with outperformance in recreational fiberglass product and pontoons.
U S outboard engine unit registrations were down 3% in the first quarter for the industry.
On a rolling 12 month retail sales basis Mercury continues to gain significant market share capturing more than 400 basis points of share over the last 12 months and 200 horsepower and greater categories.
And I turn the call over to Ryan for additional comments about financial performance.
Thanks, Dave and good morning, everyone.
Brother delivered yet another fantastic quarter with record first quarter sales operating earnings and EPS.
When compared to prior year first quarter net sales were up 18% with adjusted operating margins of 15, 8%.
Operating earnings on an as adjusted basis increased by 10% and adjusted EPS of $2 at 53 cents increased 13%.
Sales in each segment benefited from higher prices implemented since the first quarter of 2021 and increased sales volumes, partially offset by supply chain inefficiencies and unfavorable changes in foreign currency exchange rates, while each segment's operating earnings continued to be impacted by increasing inflationary pressure.
Yours and spending on growth related initiatives.
Turning to our segments, our propulsion business delivered yet another quarter of strong top line growth with a slight earnings increase versus a historically strong first quarter of 2021 .
Revenue increased 7% versus the first quarter of 2021 as strong global demand for all product categories continue to be enabled by increased production levels.
Operating margins were lower by 110 basis points as higher sales and favorable absorption were more than offset by higher manufacturing cost primarily caused by inflation and continued investments in capacity and product development.
Note that although we've been taking price in certain markets and product lines. The majority of the propulsion price increases occur from this point forward in the year.
Our parts and accessories businesses saw a 34% increase in sales and a 19% increase in adjusted operating earnings due in large part to the 2021 acquisitions I've never go rely on and see Medtronic.
Excluding the impact from acquisitions organic CAG revenues grew by 2% against a very tough 'twenty 'twenty. One comparison, despite sales and earnings being impacted by supply chain constraints, leading to increased sales backlogs together with a slower start to the boating season in northern markets due to unfavorable weather.
Conditions.
As anticipated adjusted operating margins of 18, 9% were down when compared with the prior year quarter, primarily due to the impact of recent acquisitions and increased input costs.
Our boat segment delivered strong topline growth and solid earnings increases despite continued supply chain disruption and cost inflation.
Sales were up 18% and adjusted operating earnings were up 6% when compared with the first quarter of 2021 with five of our brands exceeding 10% operating margins for the quarter.
Sales increases in the quarter were led by particular strength in aluminum freshwater including our pontoon businesses and our recreational fiberglass brands.
Increased volume and pricing enabled solid operating earnings growth, which was also impacted by higher costs due to manufacturing inefficiencies, resulting from supply chain disruptions and ramp up cost at Boston Whalers Flagler facility.
Freedom Boat club, which is included in <unk> acceleration contributed more than 3% of the boat segment's revenue during the quarter.
Turning to pipelines, we produced at a wholesale sold more boats in the first quarter than we did in the first quarter of 2021, a remarkable achievement given the current supply constrained environment.
Supply chain challenges, including delays in receiving certain components continues to result in a deferral of shipping certain nearly completed boats to subsequent quarters.
Dealer pipeline inventories decreased from the first quarter of 2021 by about 1000 units to a historically low 13600 units.
This translates to just over 19 weeks of inventory on hand measured on a trailing 12 month basis, which is about half of where inventories typically stand at the end of the first quarter.
Drilling deeper.
The 13600 global pipeline units only 7000 of those units are located in the United States with only approximately 5000 of these units actually available for sale.
The remainder of the units are already retail sold most of which are held by dealers in the northern U S boating markets to be delivered to customers in the second quarter as weather begins to improve.
Inventory levels also differ by brand with certain fiberglass product, including Boston whaler, having on average less than one boat inventory per U S dealer.
As a result of these dynamics and despite increased production in 2022 we expected inventory weeks on hand in 2022 will follow a similar trajectory to that experience last year.
Moving to our outlook for the remainder of the year. Despite the current headwinds David and I have discussed our Q1 operating outperformance puts us in a position to raise full year EPS guidance, even after accounting for the 25 of additional interest expense.
Related to our first quarter debt issuance.
In addition, our accelerated and additive share repurchase strategy provides incremental benefits for the year.
These benefits when taken together with a slightly improved view of full year top line growth.
Resulted in us raising our full year adjusted diluted EPS guidance to between $9 80 and $10.30.
Note that the M&A completed and announced here in April has been included in this outlook, providing it very small benefit for 2022 with a more meaningful revenue and earnings contribution in 2023 and beyond.
I'll finish my comments this morning by highlighting certain P&L cash flow and capital strategy assumptions that have changed versus our original full year 2022 guidance.
As Dave mentioned earlier, the issuance of additional long term debt in the first quarter has increased our estimate of full year net interest expense to approximately $95 million.
As part of the debt offering we retired the remaining $57 million of our 2023 term loan which as of now likely completes our debt retirement activity for the year.
In February we also increased our dividend to $1 46 per share.
Our decision to increase share repurchase target given the current market dislocation will result in our average diluted shares outstanding for the year to decrease to between 76, and 76 and a half million shares.
As a reminder, we repurchased $80 million of shares in the first quarter and another 10 million. Thus far in April and we anticipate second quarter repurchase activity to be no less aggressive than our first quarter cadence.
Additionally, we anticipate slightly greater working capital usage for the year, primarily related to our business is holding higher levels of inventory to ensure consistent production levels.
Our anticipated earnings impact due to tariffs has improved by $5 million due to certain China 301, exclusions being reinstated in March but still results in an estimated $60 million headwind primarily due to the 40 to 60 horsepower engines, we produce at our China facility still being subject to the tariffs.
Yeah.
I will now turn the call back to Dave for concluding remarks.
Thanks Ryan.
As anticipated our business acceleration team has had a very busy start to 2022.
Freedom opened its 350 as global location in Denmark, which is the first location in the Nordics are strong boating region.
Freedom also continued the expansion of its corporate footprint in key markets by acquiring four locations in the Atlanta area and continue to transition the branding of its recently acquired boat club locations throughout Spain.
But this acceleration also acquired Jan all marine a portfolio of marine assets in the southern United States, including the greater Atlanta area.
To expand shed access.
Advanced its boating as a service ecosystem strategy with subscription based models.
And fortify plans to establish a regional marine operating center that will support Freedom boat club and book Checkout.
Yeah.
Before we close out our comments. This morning I wanted to leave you with a few more updates.
On March 7th we launched our second consecutive virtual Investor day, and held a follow up Q&A session with the Investor community.
If you haven't done so already I would encourage you to view these materials, which highlights the company's strategy through 2025.
The materials can be found on Brunswick Dot com.
In late March we published our third annual enterprise wide sustainability report.
Highlighting the company's industry, leading sustainability achievements and then that is the hiring of Jennifer Koenig.
The company's first chief sustainability officer.
The ring Brunswick's ongoing commitment to advancing our enterprise environmental social and governance strategies.
Never co announced its first major capacity expansion since joining Brunswick in October 2021 .
The expansion is expected to create more than 100 additional jobs and its Ensenada Mexico facility.
Increased vertical integration and production capacity.
To deliver the necessary volume growth in addition to increased supply security.
Phil record demand, but not because of award winning products.
Mercury continued its string of successful early season saltwater boat shows that included Miami, Dubai and Palm Beach.
You captured record share of outboard engines on display, particularly in high horsepower applications.
Brunswick also continued to receive recognition for innovation by winning seven boating industry top products awards spanning out businesses and product portfolio.
But on a price that was featured on C. N B C highlighting the company's leadership and D. I.
We also received recognition from Forbes as a best employer for diversity for the third consecutive year.
Before I finish I want to thank all our global employees, who once again continued to deliver outstanding business performance and advance our next wave strategy. Despite the very dynamic external environment.
Thank you well now open the line for questions.
Thank you.
And ladies and gentlemen at this time, we'll be conducting a question and answer session.
If you would like to ask a question. Please press star one on your telephone keypad.
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One moment, please while we poll for questions. Thank you.
Our first question comes from C. I'm Sue with BNP Paribas. Please go ahead.
Hi, guys. Thanks for the question you'd mentioned a slower start to the season with you know maybe a poor weather, but maybe can you talk about trends exiting the quarter and into April like for example, the parts business was only up 2% or on an organic basis, but just curious how that evolved through the quarter and if you saw any.
End of acceleration into April .
Yeah. Thank you for the question, obviously was it was up 2%, but against like huge call last year and our early spring.
So we're pretty comfortable with where the the business is suddenly that would be a little bit of phasing, but you need to think about all of this.
It's a phasing issue.
The P&A business and sales profile is.
People get that boats.
For the season that occurs every year just question of which week two weeks forward two weeks back whatever it is that the spring starts and then there's a usage profile and then there's the wind translation profile. So I would say we're extremely comfortable with the way that P&A is performing the way it's stocking.
It's it's.
Against the huge year last year and that we are facing a little bit of a late spring. So I I see it as a very positive environment for us.
[laughter].
Okay got it. Thanks, and then you talk about how you know 22 retail essentially sold out and you're not really seeing any cancellations, but maybe can you help give us some more color on how solve the backlog as you know and how hard it is for consumers it to cancel orders I think you've taken a pause you take.
You know you have all the customer information, but maybe some more color there and you know also within that you know if you're taking pricing you know over the course of the year as costs are going up are you retroactively.
Taking the price up for both have been pre sold.
Yeah. So I mean in terms of cancellations it depends on the type of boats and a little bit on the the.
Vigil dealer even to some extent it if your preordering of large boat you can problem, that's probably at the positive of around 10% that is potentially at risk.
But the reality is if.
If you are attending.
Turning to order at sometime in the future that might not really be at risk in a in terms of smaller boats. The the kind of penalty for cancellation is is pretty modest I would say that the they're really I think encouraging for thing I think for US here is were seeing no sign of anything either at the wholesale level or a REIT.
Sale level.
Dealers up one question really which is can I get more pumps.
But there is no our momentum in the other direction at all it's just I need more boats. Please give me more boats and I believe that it.
It isn't.
No cancellations on a retail level and not associated with anybody.
Anybody wants them to counsel, who is unable at some point going to forfeit something for cancellation I think it's all about what people want to get the boat.
In terms of retail pricing normally.
But at the moment at least I think a lot of dealers have.
Have allowed themselves some flexibility in that retail contracts to pass through price. Obviously, we don't directly control the retail pricing that's up to the dealer, it's not up to us how they.
I'll handle that and we've explained before how we're handling wholesale pricing, which is we are monitoring inflationary trends.
Tightly as we possibly can.
I'm trying to adjust appropriately, but on a more frequent basis than we would have historically booked up.
Thank you.
Our next question comes from James Hardiman with Citi. Please go ahead.
Hey, good morning, So I wanted to actually dig into that last point about pricing a little bit.
There've been a number of price increases and maybe just a significantly promo being eliminated but if I really look at your three segments, where are we in terms of total sort of realized price versus 19.
And maybe can you speak to the different levels of pricing power in those respective segments. Obviously everybody's concerned that we will see that the reintroduction of demand elasticity, where would we see that first wherever we see life.
Yes, James Good morning, dry and I'll I'll take that to start and then Dave can can follow up we obviously have taken price at all all three segments, if I look at propulsion.
To date, it's been relatively minor versus I think you asked for 2019, 'twenty 'twenty, maybe we'd just say pre kind of pre COVID-19 .
That that looks low to mid single digits up to this point.
Maybe mid single digits, because we're talking a couple of years, which is just slightly over a really what they normally do.
We said in the comments that propulsion, our U S. Outboards, certainly, we'll see a little bit more price here at the remainder of the year. So that that number will go up a little bit.
If I move then to kind of the parts and accessories business. This also depends on whether it's aftermarket or the OEM side of the of the house aftermarket has gone up probably less than the OEM side certainly on.
The aftermarket increases kind of let's call. It mid <unk> mid to high single digit increases to date with again more probably on the horizon with OEM, probably looking more than that call. It low double digits or so and then if I look at both I mean, this is where we've been pretty clear eyed.
On call after call. If you look cumulatively, you're probably somewhere in the mid teens to about 20%. If you look at what would be kind of two plus years.
A couple of model years, and then we would anticipate a little bit more of a price ability as we move into the model year 'twenty 'twenty three.
Elasticity is always a good question and you probably are going to know that I'm going to say, but this is a long term game for pricing we are.
Attempting to use price to cover inflation, which we all know is a is prevalent in the environment, but we also are cognizant that we don't want to our price our end consumer. So we touched just about every part of the boating ecosystem between the engine the parts and the boats were being a relatively pru.
Across all segments and and phasing these are pricing.
The price and to cover the inflation as it arises, but you know not taking more than necessary.
Just one additional comment we've said for a long time about.
80% of all boats costing less than $50000 and they used to be over 80%, but we checked it just a couple of months ago when it was 78%.
So over this whole period, we still have a huge portion of our portfolio.
Aimed squarely at you know middle income consumers still extremely affordable.
So that's still gives you a good idea of what the kind of praetor pricing looks like even though we've.
That's certainly been forced to elevate some pricing where we are in this for the long term.
That's great color and then just one more for me the $300 million in projected share repurchases now seems to be a pretty big signal about where your stock is trading relative to what you think intrinsic value is maybe speak to that and whether or not you might lean into that even further.
It continues to be depressed.
Yeah. Thanks, James Yeah, I think obviously, we're trading at a discount and then obviously the sector has had a significant pull back in and we believe that we are significantly discounted to any measure of intrinsic value. So this is a good time for us to deploy capital we have a very strong balance sheet.
And are able to deploy capital very flexibly and we certainly think that this is a great time to be repurchasing shares and could we lean more into it yes, absolutely we could lean more into it.
We think that that's a good target for now, but we will we'll see how the year develops and whether that continues to be.
They are the right the right value a place to put the to put our dollars. It's fair to say, though it would James very likely only go up not down.
If that's what you're asking.
Perfect I appreciate the color guys. Thanks, Thanks James.
Our next question comes from Mike Swartz with Truest. Please go ahead.
Hey, guys. Good morning, just wanted to touch on your your your retail outlook for the year and are in.
Maybe as it pertains to your prior outlook I think you said low single digit growth in understanding that retail and wholesale are fundamentally separated for the time being but maybe give us a view of just with some of the supply chain issues that you've seen how or I guess has your retail outlook for the year changed at all.
Yeah, Hi, Michael I, you know I think we discussed this.
And whether we should do anything but I think the situation for us at the moment as it's very early in the year.
Production remains strong we have some specific.
Kind of phasing issues. If you like I think around this time of the season, which is a bit of an inflection point. So we simply don't have enough new information to be able to update that call at the moment, if we see something developing in a different direction. Obviously, we'll do that but we just felt that you know modifying that in and one deck.
Shneur. Another was we just don't have enough information right now.
Okay Fair enough and then maybe just on the I apologize if I missed this as well, but just on the the throat boat production expectations for the year. I think previously you had called out about 40000 units is that and I know you took guidance up here. So is that still the right number and we should think about that maybe the increment is being price.
<unk> or something else.
Yeah, that's still the right number for US I think the boat group and the teams in our individual plants and brands have done a great job in the first quarter of the year.
I expect they'll continue to do a great job in the and then the balance of the year. So yeah. That's a good number.
Okay, Great and then maybe just a final question just at a very high level, maybe just give us some color or just quanta qualification of it would be how the supply chain looks today relative to two two months ago.
Yeah.
As it migrates.
I think it's very clear that the the area that is.
Potentially the most.
The disruptive as the Covid related Lockdowns in China.
There are other areas that have generally improved in terms of availability, there's still inflation. Obviously, there are new some new inflationary.
It is associated with events around the world, but generally as Covid has diminished.
At least in the that's two upfront domestic supply base, we're seeing improved performance I think the not uniformly but generally improved performance.
At the moment, we are focusing our attention, particularly on.
Engineered components coming out of China.
As a potential source of of disruption but.
As always so far we've continued to manage our way through that it's disruptive, but we we find a way and expect to continue to find a way.
Okay. Thank.
Thank you.
Thank you. Our next question comes from Anna Glass skin with Jefferies. Please state your question.
Hi, good morning.
No question.
Thank you for giving the color on the expected change in deal cost for the average military could you maybe give some perspective on what you're assuming in terms of new fields now maybe versus historical averages given participation.
For the past two years.
Yeah, So hi on it so yes, it's a good question. So we kind of did the calculation based on our kind of average votes average boats along with some data that's really well established from.
Policy sources. So for example, the E P a.
Publishes average boat usage states every year. They they say boats, we used about 35 hours in a season, obviously, there's seasonality here as well in the northern markets season is shorter.
So if you look at our average horsepower, which is in the kind of 140 horsepower range for an outboard.
You look at the boat that it's on the fuel consumption you multiply that by the hours and the the delta in fuel price between earlier this year and early last year, which is in the adult fifty's range something like that.
Come out with about a.
$160.
So we we.
Just to round that up a bit we put it at $200. Obviously, if you have a more powerful both if you have more engines on the boat the delta is going to be higher, but we thought it would be useful to dimension. It for the average both that we make and also to leverage really well established.
Good policy.
Average usage profiles, that's that was the calculation.
You will you will see and although I know that there was another estimate them to do with wake sports boats. They tend to use more fuel because they use a lot of power and talked to generate that big wake behind them.
But for our average boat member up about two thirds of all boats aluminum fishing boats.
The fuel usage is very low.
But just another thing it's about a quarter of the annual fuel usage of a compact car.
So that's another way to think about it.
Great that's.
That's very helpful. And then you know glad to hear the Mercury pathway expansion there still on track for Park Hill, as we think about that incremental capacity and higher horsepower can you get there.
No the product and Nick and channels that are impacting margin.
You see that ramping.
Yeah, I think well first of all I can tell you it's all spoken for.
Already so so which is very exciting so yeah. That's really good I think we've you know we've said before it's aimed at the higher horsepower engine ranges, so 175 horsepower and above.
We're adding are around 60% capacity in that horsepower in that set of horsepower nodes from 175 horsepower upwards at all.
On track at the moment and we're very excited about being able to bring those additional customers onboard.
And then it also and from a margin perspective, you know we've been pretty clear that we have certain.
Large customers it that often take a big chunk of the available inventory.
The additional capacity will enable us to sell more engines internationally to repower dealer channel and two other OEM customers that maybe aren't even receiving engines today are those channels often are margined up and so that's a.
That will enable a little bit of margin expansion, which is what you're seeing obviously in the back half of the year certainly in the fourth quarter and then into 'twenty three as you looked at our strategic plan up to 2025.
Great. Thank you very much.
Yeah.
Thank you. Our next question comes from Kevin Heenan with J P. Morgan. Please go ahead.
Hey, guys. Thanks for taking my question I guess on the boat segment revenue.
With the retail side coming in a bit softer year to date your production's on track I guess, what is driving the increase in your full year revenue outlook is that pricing or more confidence and underlying demand.
Yeah.
Hey, Kevin.
Thanks for the question, it's actually it's a good question you know when we look at we're sitting in January and we're looking at a whole year of output. There's a lot of uncertainties and certainly when we were in January looking at full year segment numbers. There was there was even more uncertainty than there is today in terms of inflation and supply chain and alike. I think we're just.
No fundamental changes in assumption, except that now we are one quarter in and production is up over last year, and we anticipate that continuing as Dave said the boat business has been had.
The most with inefficient manufacturing due to our supply chain just not getting it. It's literally is as easy as one or two parts on a boat that need to be finishing completed before it could be wrapped and sent to a dealer that the boat business has gotten their share of that but despite that in and in light of it getting.
You know a little better as Dave mentioned this is a production up over in the first quarter and it seems like we're.
On pace to be able to do that for the year. So just oh, we're three months closer to the end of the year end and we're a little bit more dialed in and what the what the business can deliver.
Got it. Thanks, that's helpful and just a follow up kind of Dovetailing on Anna's question on the propulsion segment, I guess with the capacity expansions coming on in for Q I'm, just trying to bridge. The gap between you know the mid teens revenue outlook this year with the <unk>.
8% CAGR you've laid out longer term is there any reason you can't sustain the double digit growth into next year as the capacity comes online or is there something else to consider in that trajectory. Thanks.
No. That's another good question and Dave can chime in as like when you do a long term projection. We did four years. This year. There's so many puts and takes not only pricing and production capability, but where those engine goes what the market performs.
If the question is could there be outperformance. The answer is yes, there absolutely could be but as we look year in and year out you know the CAGR is exactly what it is an average and coming out of this year and looking ahead I you know it certainly will have the ability with more engines and a better mix potentially too to outstrip that estimate.
Thank you.
And our next question comes from Fred Wightman with Wolfe Research. Please state your question.
Hey, guys. How are you could you just give a little bit more detail on what you're seeing out of Europe from a retail perspective any of the geopolitical situation rubbing off on People's willingness to spend on some of these discretionary products.
Yeah. Thank you for the question.
I think so far sales are holding up well in Europe across all of our categories. I think obviously, there's likely to be a differential between.
Some of the countries that are somewhat more geographically removed from the.
The immediate conflict than others.
But so far things are holding up despite the fact that there continues to be inflationary pressure and obviously sentiment issues.
In Europe , we we just as just as in the in the U S. We have more demand for our engines, particularly in Europe than we've been able to satisfy.
We have a significant backlog that we need to get through and similarly on the P&A side, we have a similar backlog of products that we need to get through so we're not seeing softness at the moment, but obviously.
Because of the.
What's going on in the region, we've got our antenna up.
It makes sense and then can you just talk about the Jay and our transaction and how getting more involved with the dealership channel sort of fits into your longer term strategy.
It's something that we should sort of expect a little bit more capital allocation to go to going forward is it a one off how should we think about that.
Yeah, I think a couple of things to think about one is that.
Made two transactions one was Jane on Marine and then the other with the boat clubs on Lakeland Yeah.
And.
Atlanta area is really a very high potential area for freedom that is there was no populated with nearly enough clubs. So I would think about those two transactions as first of all an opportunity for us to get more freedom clubs.
In the Atlanta area significantly more there's a lot of growth potential.
And then Jan on Marine has four marinas only two had boat clubs and so an opportunity to even more emphasize a freedom of buildout freedom within that acquisition.
One of the things we talked about our Investor day was a boating as a service ecosystem strategy, we sometimes call build around the boat to.
What you've seen us do with freedom is first of all it's a great business just stand alone. The margins are great. The growth is great.
But you've seen us now deliberately feeding more engines and boats into freedom.
On the front side, we use more P&A and freedom and you've seen us establish the buteco pre owned boat sales platform to get more margin on the bus both exit both tech so there's a tremendous.
This opportunity for synergy around <unk>.
And we have been exploring other ways in which we can add more synergistic margin and add growth to that ecosystem.
And GNL Marina allows us to prove out some of those concepts will be a bit more forthcoming on exactly.
So that specific detail, but we need to.
Build some operational muscles.
We need to do it and in the real world to prove out some of those concepts, but it's essentially I'd say it.
An extension of our boating as a service.
Ecosystem strategy and that's the the majority of it.
As we begin to evolve that mobile will share more on the specific details.
Maybe on your capital strategy point Fred.
It's a modest play in line with the kind of small bolt on deals we've done year in and year out that's kind of embedded in our in.
And our existing capital strategy for the year. So that's how you should think of it from a spend perspective.
Thank you. Our next question comes from Joe Alpha Bello with Raymond James. Please go ahead.
Hey, Thanks, guys. Good morning, I guess first question I want to say on the on the retail outlook for you guys in the industry, given where field inventories are.
How much is retail coloring your financial forecast for this year and maybe how you're thinking about next year and I guess, what I'm, what I'm trying to ask it if the trends that we saw in Q1 persist where the industry was down 11.
Is there downside to your guide or is it almost independent at this point.
No not really if you know what those levels as we mentioned we moved about backlogs are very high we're.
Sold for the year all boats backlogs in engine of P&A vary.
Hi, So I would say that we are extremely robust too.
Most foreseeable developments yeah, it's not really coloring out 2022 thoughts Paul as we get further into the year. Obviously, we will be developing are of you you know what that looks like for 2023, but at the moment we have.
Literally not change anything that we're doing on capacity expansions or.
Any of the other initiatives that were.
Part of our overall strategy and Joe I'd also note that some of the additional color we gave on the pipeline.
Slide today, I mean, there are 4000 or so retail sold boats that are still sitting in our dealer and dealer hands waiting to be delivered those are not in ssi. So it is fair to say as it always is at this time of year that the true retail is probably even more dislocated.
From what Ssi is seen now that you know who knows how that's going to shake out, but as Dave said earlier, if if the wholesale was there no. There's no doubt that we believe that retail will be there as well.
Okay. That's very helpful and just maybe just to kind of follow up on that if I look at your Q2 guidance the.
Lack of earnings flow through versus what we've seen historically are you expecting anything to get worse from a supply chain standpoint does that reflect higher interest expense.
Why the lack of earnings flow through I guess in this quarter. Yeah. Joe. This is obviously got a lot of a little bit more attention. This morning than we anticipated.
No. There is no change in our view on the second quarter from from January you know, what we're going to incur an extra just shy of 10 cents like eight cents of interest given.
Given the debt that we took out and the benefit from share repurchases, obviously will not cover that because that's more back half loaded just given the way the math works, so really you're getting more interest than anticipated and to be fair. It's it's it's still the second quarters. There is an.
An uncertain environment, and and we've given ourselves a little bit room for flexibility, but no you should not that the underlying assumptions of the strength of the market our ability to deliver and perform it absolutely not changed from January .
Okay, great. Thanks, guys.
Thank you. Our next question comes from Eric Wold with B Riley. Please state your question.
Thanks, Good morning, and thank him a fall it was kind of on the.
Comments around unit boats price, you know $50000 and below obviously the majority of it when you sell I guess going to the pricing strategy to cover cost increases is that across the board connect me with all the.
Price points do you tend to.
Lagged somewhat or could you lag somewhat on the lower end boats, two did not lockout buyers or did that strategy not change by by price point.
Well I think you know in the end what by has experienced since the retail price so out prices a component of that but not a not the entirety, all but you know I would say generally.
We are trying to cover all costs are we a little bit lagging sometimes I would say.
Probably a little bit lagging in some areas certainly.
Propulsion, if you think about propulsion that it it is a much larger portion of the cost of a small boat than it is of a large boat and there's just.
The engine is a is the highest technology you know part of our aluminum fishing boat typically.
And if you think of what Mercury's being able to do so far which is really hold pricing at very reasonable levels as Brian mentioned earlier that is obviously more helpful.
For controlling inflationary costs overall on a small boat than it is on a large bolt on a large bowl. There are other components that are so the total bill of materials is much beyond the engine.
So I think a button kind of natural means if you like because of the good control of engine cost and pricing we are probably.
Controlling costs with smaller more value orientated boats.
More tightly than some of the bigger boats and suddenly given demand for the bigger boats.
There's less immediate.
<unk> thought about.
Any other any other strategy.
Thank you and.
And our next question comes from David Macgregor with Longbow Research. Please go ahead.
Yes. Good morning, Thanks for taking my questions just with respect to the parts and accessories business can you say, how just how dilutive the acquisition towards the margins.
Hey, Dave.
Positions, we talked about.
PAA from from last year help from us Okay. Yeah.
You know, we consistent with our guide for the year, David Nabokov has quite strong gross margins and operating margins that are slightly dilutive to the segment, although still a.
Quite accretive to the overall Brunswick I think what you have seen is even in the first quarter you saw a probably opex come in better than anticipated certainly better than our internal forecast and you know never co is certainly a place where we are right sizing kind of SG&A to match the rest of the organization.
You'll you'll continue to see that throughout the year and even even into next year, but there's a there there are certainly some pockets where we can improve but that's that's how we look at it.
<unk> rely on see Medtronic are collectively would be still accretive to brunswick, but slightly dilutive to the overall P N a operating margins.
Okay got it thanks for that and then I guess just get back to this whole discussion today around 78% of the votes or less than 50000.
I'm not sure if you have sort of access to data through your dealer partners, but any sense of what percentage of.
Sales are based on credit or incorporate credit into the purchase.
Yeah.
Could've tried to credit transactions that we see about 50%.
Bought with credit, but there may be some other financing that goes on behind the scenes that we're not aware of but yet of the ones that we are we can see about 50%.
Thank you.
And our next question comes from Derrick Johnson with BMO capital markets. Please go ahead.
Hey, good morning. Thank you. So when you talk about G. D leap deliveries retail sold boats and some northern markets, what what exactly does that mean I just wanted a definition really because you said, it's not an exercise so they're not registered.
So are these just deposits in and really what I'm getting at are these are these cancel.
No no. These are boats that have been.
Vault, but not put in the water and so.
Yeah, they're not cancel their fully paid up.
Boats that for example, and some of them in in Minnesota and to a large extent in Canada, Iceland, Malta. So they won't registered them until they go into the water. That's fully paid up boats completely sold just not registered yet.
Okay. Okay got it great and then in terms of your your your boat business you talked about aluminum fish.
Luna freshwater.
Recreational fiberglass outperform in the quarter.
The reasons behind that.
And should that continue.
What did they think reasons.
The reasons behind that.
We are we have a very strong bulk portfolio in that aluminum category.
And I think our production has been very solid. So if you think across our aluminum product lines. Lund is a really premium aluminum freshwater boat really just almost like the Boston whaler if the aluminum.
World if he likes those sales of that have been really strong and continue to be.
Would say that we have also been a particularly strong and pontoon which is part of our aluminum boat group as well that is a category with extremely high demand and our productivity has been very good despite.
The backdrop. So we have a we have a good product range. We've done a lot of product development in that area, which makes our product very fresh production capability has been sustained very well.
So yeah, just a combination of a good operating and fresh product.
I think and then garik from the from a finance side I'm more interested in their ability to manufacture the product to meet the design specs and I'll say I'll call out a sea ray and Bayliner that have both done a fantastic job of not only manufacturing product too.
That consumers want but also manufacturing it at the right cost so you've seen good topline growth and good margin expansion from both of those brands.
She has resulted in some of the fiberglass goodness that we've discussed.
[laughter] Oh, okay. Thanks, and then maybe if I could ask just one more you know you talk about shows like Miami and Palm Beach.
But what about some other shows the interior shows like Cleveland or Minneapolis, or whatever shows like back in.
You'll generally good our.
Loft look which is fairly recently our show sales. This year were ahead of our shows sales last year, not a huge amount of head, but a bit ahead and the reason why we emphasize the the biggest shows a couple of reasons. One is because a lot of the regional shows a really dealer shows.
And dealers don't have any inventory.
So.
Sometimes deals won't even attend the show because they have nothing to sell so you will see a lot of kind of variability from one regional shows with another regional show, depending on whether I mean dealers unless they make additional money theyre not going to go to the show.
The biggest shows like Miami, a much more organized the Oems are a much bigger part of the presence of boats. The all the boats are not the lift boats. There all boats. So that they can provide a much more consistent picture in this environment.
The regional shows do.
We can talk more about regional shows, but you'll just see them more variable depending on who's got inventory.
Thank you.
And at this time I would like to turn the call back to Dave for some concluding remarks.
Well. Thank you all very much for joining us and for the great questions.
As you've seen despite the very dynamic external environment, our business continues to perform exceptionally well.
Certainly from an operating perspective, but we're also making great progress with the strategic initiatives that support our 2025 plan, including the capacity expansions and new product launches on the M&A.
In Q2, we expect to continue to be in this dynamic environment, but as you've seen with the portfolio of businesses we have.
Built over several years the high degree of recurring revenue the high growth potential the structurally higher margins that we have that position us extremely well both for Q2 and the balance of the year. So we're very we remain extremely excited about the year completely on track with our plans for the year on track with that.
Plans for 2020 five and we're very excited.
Thank you bye.
Thank you all parties may now disconnect.
Have a great day.