Q2 2022 Brunswick Corp Earnings Call
Good morning, and welcome to Brunswick Corporation's second quarter 2022 earnings Conference call all.
All participants will be in a listen only mode until the question and answer session period.
Today's meeting will be recorded.
Do you have any objections you may disconnect at this time.
I would now like to introduce Niihau Clark Senior Vice President Enterprise Finance Brunswick Corporation.
Good morning, and thank you for joining US with me on the call. This morning are Dave <unk>, CEO and Brian Mclaughlin CFO .
We begin with our prepared remarks, I would like to remind everyone that during our 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 of these documents are available on our website at Brunswick Com.
During our presentation, we will be referring to certain non-GAAP financial information second.
Reconciliations of GAAP to non-GAAP financial measures are provided in the appendix to this presentation and the reconciliation sections.
And consolidated financial statements accompanying today's results.
Now I'll turn the call over to Dave.
Thanks, Nate and good morning, everyone.
In the second quarter, we delivered our first ever quarter with more than 300 million of adjusted operating earnings and together with record revenue and EPS continued our trend of exceptional performance in a challenging macroeconomic landscape.
We maintained our strong focus on cost control and operational efficiencies, while continuing to invest in new capacity, new product programs and initiatives.
So sorry to fuel future growth and market share gains.
All of our divisions contributed to this strong performance, while continuing to actively manage our supply chain and negotiate macro volatility.
Consumer demand for our products remains strong as we work through a period of tougher year over year retail comparisons versus a particularly strong first half of 2021 well.
While being impacted by continued low field inventory and some enduring supply chain disruptions.
Global boats field inventory levels increased in the quarter over the same prior year period, although there remains 55% lower versus the same time in 2019.
This is notable as the 2022 retail season had a slower start in some parts of the U S and Canada, while gaining momentum in the latter part of the quarter.
Our P&A business backlogs remain elevated.
Overall, our production remains on track and the percentage about boat production that is already retail sold continues to be high, especially for our fiberglass Brian with no evidence of wholesale cancellations across the enterprise.
As the economic outlook continues to create overall market and sector dislocation.
We executed $140 million of share repurchases in the second quarter, bringing our year to date share repurchases to $220 billion and.
We plan to continue an aggressive repurchase schedule in the back half of the year.
Yeah.
Yeah.
Prior to discussing our segment performance for the quarter, let me spend a few minutes updating our view on external economic factors consumer activity and engagement.
First we're seeing some abatement of supply chain constraints and inflation from recent peaks in a number of areas, resulting in more efficient manufacturing across our footprint.
While our businesses continue to experience elevated inflation any moderation occurring in the back half of the year will factor into our pricing strategies.
From a consumer standpoint, we continue to see limited signs of fuel prices Detouring boating.
Even if the world has opened up but it's just a more pandemic impacted 2021 boating participation remains strong I'm, a little changed from robust COVID-19 levels.
Specific to the U S market population migration towards warmer regions since 2020.
So it takes a water has increased.
Six of the 11th largest boating markets reporting net household growth.
Web search interest for boats and bulb club related purchase and activity has trended up coming out of Q2, and most recently such as football club are above prior year.
Lastly, our internal consumer insights reflect healthy traffic a bulk purchase consideration similar to prior year.
I'd like to turn to the performance highlights of our segments. During the second quarter. Let me note each of our segments delivered sequential quarterly top line improvements.
Oh propulsion business continues to deliver outstanding results with 13% topline growth with the second quarter 2021 enabled by increased production and customer demand.
Mercury Marine continues to expand outboard propulsion retail market share around the globe.
140 basis points over the past 24 months, including 630 basis points and greater than 200 horsepower outboard engines in the U S.
Yeah.
That's the additional outboard engine capacity at the phone to Lac, Wisconsin facility comes online towards the end of 2022 and supply constraints are alleviated, we expect for the global market share gains.
Our parts and accessories businesses delivered strong sales growth as benefits from acquisitions completed in 2021 steady engine P&A sales in the U S and strong OEM sales from our advanced systems group helped to offset headwinds related to early quotes of poor weather in certain northern location.
Supply chain constraints in our distribution businesses and retailers returning to more normal stocking patterns.
Segment earnings were flat against an extremely strong second quarter 2021, but how far ahead of second quarter 2019, with boating participation remaining elevated and continuing to drive our aftermarket businesses.
Our boat business posted robust topline growth in the quarter with double digit operating margins, which increased sequentially.
<unk> consecutive quarter.
Each product category delivered strong topline growth with our aluminum fishing and recreational fiberglass brands also significantly expanding operating margins.
Finally freedom boat club continues on its growth trajectory in the U S and Europe and now has more than 360 locations, reaching 50000 membership agreements covering 80000 members network wide and a fleet size of nearly 5000 boats.
All while generating exceptionally strong synergy sales across our marine portfolio.
On a same store basis freedom membership growth in the quarter was 30% higher than the same quarter in 2020 one.
Next I'd like to review the sales performance of our business by region on a constant currency basis, excluding acquisitions.
In the second quarter, nearly all regions posted substantial sales growth, but the second quarter 2021 with Canada, and Europe, delivering strong sales growth in every business unit.
Overall international sales were up 7% versus the prior year quarter.
In U S sales grew 14%.
Sales in Asia Pacific were down slightly against extremely strong 2021 comparisons, although nearly doubling since pre pandemic levels in 2019.
Our comments I'll propulsion market share well.
We have focused our recent commentary, but all continuing share gains in the U S over the past five years, especially in the high horsepower categories.
The same share gains are happening across the globe.
Data indicates we are taking share in each region with significant runway still to conquest.
Table by the additional capacity coming online by the end of this year.
From an industry view continued low product inventory remains of interest rates on retail sales growth was strong in 2020 one comparisons.
Main powerboat segment was down 16% versus the first half of 2021, but just slightly down versus 2019.
In addition, preliminary June dates that reflects a narrowing of the U S retail gap versus prior year as trends improved through the quarter.
I would urge and industry data is more favorable as the first half of 2022 was flat to the first half of last year and up.
10% versus 2019.
Yeah.
Brunswick boat retail performance in the second quarter was broadly consistent with the overall market performance with outperformance in recreational fiberglass products in pontoons.
And our aluminum fishbowl brands, we are focused on margin maintenance and expansion and have shifted production to higher margin product lines at the recent expenses some unit share value aluminum product.
As important Mercury continues to maintain its very strong market share in all of these product categories amongst 75 horsepower and greater outboard engines Mercury as increased U S market share in each of the last five years, gaining almost 600 basis points.
I'll now turn the call over to Ryan for additional comments in our financial performance.
Thanks, Dave Good morning, everyone.
Project delivered yet another fantastic quarter with record sales operating earnings and EPS for any quarter on record.
When compared to prior year second quarter net sales were up 18% with adjusted operating margins of 16, 4%.
Operating earnings on an as adjusted basis increased by 13% and adjusted EPS of $2.82 increased by 12%.
Sales in each segment benefited from price actions taken in the last 12 months, partially offset by unfavorable changes in foreign currency exchange rates and supply chain inefficiencies.
And each segment operating earnings were also impacted by continued material labor and freight inflationary pressures and spending on growth related initiatives.
Note that changes in foreign currency exchange rates were a mid double digit million dollar earnings headwind in the quarter more than double the anticipated impact.
On a year to date basis Brunswick has also delivered record results, including over $3 5 billion of net sales $568 million of operating earnings and $5.35 of diluted EPS.
It's higher than any previous full year in brunswick's history aside from last year.
You'll note that we have shown comparisons to 2019 on these two slides to highlight the strong growth CAGR over the last three years and the record performance of the business versus the second quarter of last year, which was the previous best quarter in company history.
Yeah.
Turning to our segments, our propulsion business delivered yet another quarter of outstanding results with record top line earnings and operating margins.
Revenue increased 13% versus the second quarter of 2021 as continued strong global demand for all product categories resulted in increased sales volume, which continues to be enabled by increased production levels.
Mercury also enacted certain price increases in may primarily targeting 175 horsepower and above outboard categories.
Operating margins were up 50 basis points and operating earnings up 16% each enabled by increased sales and lower operating expenses, partially offset by investments in capacity and product development.
As a reminder, the previously announced capacity expansion at the find the Lac, Wisconsin facility, which will add significant capacity for high horsepower outboard engine lineup remains on schedule for completion in the fourth quarter of this year.
This expansion, which will add more than 50% capacity and 175 horsepower and higher categories will be critical in driving future top line and earnings growth together with market share gains.
Our parts and accessories businesses saw a 19% increase in sales due in large part to the 2021 acquisitions of Navajo rely on Etsy Medtronic.
Excluding the impact from acquisitions organic P&A revenues were down 4% against a very tough 2021 comparison, but were up 29% versus the second quarter of 2019.
U S N Gen PNA and core <unk> sales were up quarter over quarter, while sales in our lower margin distribution businesses were negatively impacted by the third party product availability and aftermarket product businesses outside the U S.
So apply chain constraints were particularly acute in international regions with U S. Sales are also impacted by a slower start to the boating season in northern markets due to unfavorable weather conditions.
Operating earnings were flat against Q2 of 2021 given all the factors previously mentioned with benefits from acquisitions being offset by outsized material and freight inflation. However.
Earnings without any benefit from acquisitions were still up approximately 20% versus the second quarter of 2019.
Our boat segment had a fantastic quarter delivering strong top line and earnings together with double digit operating margins. Despite continued supply chain disruption and cost inflation.
The boat segment reported a 27% increase in net sales due to increased sales volumes to dealers.
Segment operating earnings and margin growth were enabled by the increased sales volumes together with operational efficiencies and positive mix, partially offset by inefficiencies, resulting from supply chain disruptions inflation pressures and the production ramp up of the new Boston Whaler Flagler facility, which will be substantially.
Complete by the end of the third quarter.
Freedom Boat club, which is included in business acceleration contributed approximately 6% of the boat segment's revenue during the quarter increased from first quarter 2022 as freedom benefited by acquisitions of both third parties and franchises.
Turning to pipelines are production continued to enable more wholesale boats to be sold in the second quarter of 'twenty two than we did in the second quarter of 2021.
However supply chain inefficiencies continued to result in delayed components and ultimately the deferral of shipping certain nearly completed boats to subsequent quarters.
As of the end of the second quarter. There were approximately 10000 units in dealer pipeline inventories around the world still down 55% from the halfway point in 2019.
This translates to just over 16 weeks of inventory on hand measured on a trailing 12 month basis, which is significantly lower than where inventories typically stand at this point of the year.
The inventory position in the U S is even lower.
Just over 5000 units available or 12 weeks on hand.
Inventory levels also differ by product category with fiberglass product, including Boston Whaler and sea Ray remaining at significantly low pipeline levels due to continued high percentage of retail sold products coming out of our manufacturing facilities.
We anticipate end of the year pipelines to remain thousands of units and many weeks on hand below historical averages.
Moving to our outlook for the remainder of the year. Our continued operating outperformance puts us in a position to raise the bottom end of our full year EPS guidance, even after absorbing the approximately 18 cents of additional anticipated unfavorable foreign currency exchange rate impact in the second half of the year.
In addition, our accelerated and additive share repurchase strategy, well, which I will discuss more on the following slide continues to provide incremental benefits for the year.
Finally, our focus our production output and controlling operating expenses is anticipated to help minimize the impact of continued challenging inflationary conditions.
The result is a narrowed full year revenue guidance of $6 nine to $7 $1 billion and adjusted diluted EPS of between $10 and $10.30.
I'll finish my comments this morning by highlighting certain P&L cash flow and capital strategy assumptions that have changed versus our prior guidance.
As mentioned on the previous slide we now anticipate a $35 million to $40 million full year earnings headwind due to changes in foreign exchange rates, primarily related to the strong U S. Dollar.
In addition, our anticipated earnings impact due to tariffs has improved by $10 million, but still resulted in an estimated $50 million headwind primarily due to certain components used in outboard engine manufacturing exceeding 75 horsepower all of which are manufactured in the United States still being subject to the tariffs.
Finally, we continue to plan on taking advantage of the current market and sector value dislocation by increasing our planned share repurchases for the year.
We have repurchased $220 million of shares year to date and anticipate repurchasing $400 billion of shares for the year, an increase of $100 billion from our previous estimate.
That's all resolved and our average diluted shares outstanding for the year to decrease to between 75, and 75 and a half million shares.
Our operating performance together with continued capital strategy execution.
And an all time high of $500 million of capital returned to shareholders in 2022 through share repurchases and dividends alone.
I will now turn the call back to Dave for concluding remarks.
Thanks, Ryan I'm delighted to share some recent highlights from across the company.
During Q2, we launched the all new theory at select 260 <unk>.
Which is designed by an all female design team and it's the first boat boat to showcase the new Sea Ray design language. The model its been tremendously well received in the marketplace.
Mercury continues to advance market share and deliver new products with the recent announcement of the next generation of 25, and 30 horsepower four stroke outboards I'll speak more about both of these in a moment.
As I mentioned earlier Freedom boat club has accelerated at a rapid pace. We now have more than 360 global locations and 80000 members globally.
Integration of our recent franchise territory acquisitions is proceeding well, including the Tampa Bay operation in territory, the largest territory and the freedom network.
We advanced our sustainability initiatives with the completion of the installation of an array of photovoltaic solar panels in Portugal.
Additionally, we recently announced the partnership between Mercury Marine and Alliant energy to build a five megawatt 32 acre solar array in eastern fond of La County.
Construction on this project is anticipated to start in spring 2023.
We're very excited about the launch of tremendous momentum all Blue Planet, Our Global Brunswick initiative focused on inspiring our communities, particularly those who are under represented on the water to engage with and enjoy the restorative power of being on or around water.
The recent launch events generated more than $2 5 billion impressions.
And in June we had four of our fantastic women leaders selected to the boating industry magazine 20, twenty-two list of women, making waves.
Which celebrates women, making outstanding contributions to the recreational marine industry.
Yeah.
I'm going to finish this morning discussing new products, which is always one of my favorite subjects.
We have an exceptionally busy second half on new product launches across the enterprise with this slide capturing only a few that I'm able to discuss at this stage.
In addition to the new CRA S elects to 60 outboard and Stern drive that I discussed earlier, we will be launching exciting new models and technologies across all our boat brands, but the first IBO model coming from Boston Whaler in early August and many more to follow.
Two weeks ago Mercury introduced its next generation of 25, and 30 horsepower four stroke outboards.
Engineered from the ground up to be lighter faster and easier to operate and maintain.
These models come standard with digital controls and connectivity.
And Bill just to connect to the most advanced digital gauges in the industry and to our mobile applications Derma.
Demonstrating how we are again migrating advanced technology initially introduced on larger product to benefit all segments.
Mercury also continues to advance towards the commercial launch of its abbots all line of electric outboards.
We will launch some other very advanced and exciting new product by the end of the year.
Finally, our advanced systems group will soon be announcing new connectivity solutions and advances to its line of advanced energy storage and power distribution solutions for marine and specialty vehicle applications.
Yeah.
That's the end of our prepared remarks remember Tomorrow Wednesday November 16th on your calendars as we've invited the investment community to our test facility at the Lake X outside of Orlando, Florida for a day on the water to experience some of the new products and technologies I just described.
Well now open the line for questions.
Thank you.
And 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, a confirmation tone will indicate that your line is in the question queue.
You May press the Star key followed by the number two if you would like to remove your question from the queue.
For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
Once again to ask a question press star one on your telephone keypad one moment, please while we poll for questions.
Our first question comes from Sian Sue with BNP Paribas. Please go ahead with your question.
Hi, guys. Thanks for taking my question.
Nice to see the improvement on a monthly basis for the retail numbers I'm. Just wondering has that continued into July and then last time, you talked about potentially.
A slow start to the season and whether kind of delaying some registration of unit I think given your own you get you mentioned something like 4000 did that show up in the data.
May or June and how do we think about retail excluding those I guess shifted registrations.
Yeah. Thank you for your question. Good question I think July is strong I think actually.
N a as extremely robust in the first.
Three weeks of the month I think you know retail overall is strong I don't see why the trends would not continue.
The only.
It's somewhat difficult partway through a month to predict exactly how the months going to end up because.
The dealers tend to prioritize getting boats on the water and then the registrations come in the back half of the month, but nothing tells us anything materially different.
And more kind of contemporary data that we get around P&A in all water participation is very very strong in July .
I would say also some leading indicators like financing applications are about the same as year over year versus last year.
Okay got it thanks, and then I wanted to ask about Freedom you mentioned, it's up to like 6% of the vote Division revenues, but wondering how much of the flywheel is kind of kicking in is there a way to frame like how much.
Is that like P&A, and propulsion or gone into freedom as well because that's the higher usage and the need for maintenance.
Mostly just wondering how that.
Goodbye.
Yes, freedom is growing very fast organically and all.
So because of the acquisitions that we've made in the in <unk> 2021 and early this year.
Those are being integrated extremely strongly I think one of the one of the metrics. That's worth looking at is on a kind of a same store basis. If you like a same location basis.
Membership growth in the second quarter of this year was up 30% versus last year.
Which indicates a lot of strength I would say that both sell through and engine sell through in P&A sell through a very strong one of the things. This year, though is that because of boat availability.
Brunswick boat group was only able to supply about a third about a third of the boats that that freed.
Freedom needed. So the balance was secured from other Oems.
Over time, we will be building that percentage up to in excess of 75% I would say that the fruit that opportunity to grow the Brunswick portion of the.
The Freedom Fleet is also if you like another if you like a safety valve on on retail I mean, there are several thousand units of potential growth and freedom that we need to accommodate in addition to building supply chain building the inventory.
Our pipeline for the balance of the year.
Thank you and our next question comes from James Hardiman with Citi. Please state your question.
Okay.
Hey, good morning, guys. Thanks for taking my call.
So I wanted to hone in a little bit here on the boat segment obviously.
Pretty big beat there at least versus versus our numbers.
I guess first do you have a wholesale unit number you can share.
Whether or not sort of that production has been raised.
For the year I guess, one of the things I'm trying to square.
As you know it.
It seems like better.
Better unit shipments.
In the quarter versus retail that was I think safe to say weaker than expected at least through the whole quarter June sounds like it was better.
Square those two things along with this notion that it's.
Not just us saying it in marine Max said it today every dealer we say we talk to says at this notion that supply is ultimately holding back retail, even though shipments seemed like better in inventory.
Built a little bit.
Yeah, James I think Ryan and I'll kind of take this one but I think the situation improve.
Improved somewhat in inventory and suddenly.
Supply is in aggregate better than it was although we have some continuing challenges I would say, they're more isolated than they were before.
Before which is rhino.
Brian I'll give you some data on on the shipments.
The the position on the kind of supply demand balance.
I would say supply is clearly governing.
In fiberglass, particularly in large fiberglass essentially everything that we make is pretty much retail sold I would say the.
The northern markets, which are mostly the aluminum markets were the ones most affected by the late summer.
But retail is catching up but we certainly were able to build a bit more inventory in those northern markets and aluminum fish.
Which tends to be a shorter season, so it's a little bit of a bifurcation generally supply is continuing to govern a lot of.
A lot of our retail, but not equally across segments.
And then James Good morning, James.
Our Q2 wholesale just over 10000 units, which actually is the first time, we've got 10000 units out in the quarter since the second quarter of 2018, so supply chain still enduring.
Issues throughout the throughout the lineup, but certainly better than it was year over year, and we were able to keep up a pretty nice production schedule as Dave said I think we've said on a couple of quarters in a row, we think it's critical to get inventory in the hands of our dealers to continue to spur retail you're just not going to get a lot of work.
And customers.
Should there not be any bolt ons.
So we feel like this is a really nice quarter across the boat group. Yeah. I think one thing to think about on a kind of dealer basis, even in aluminum fish.
Six boats that a dealer.
So they're having to sell through very high proportion of that inventory every month and every quarter when.
They don't have the model diverse T and availability of options necessarily but that they would normally have.
Makes sense.
Maybe by way of a follow up related question.
You've talked in the last couple of quarters about not getting back to normal even.
Normalized inventory levels until 2024 is that still the case.
And I think you know where I'm going with this question right I'm sure you've heard this a.
Developing bear case.
Industry is essentially heading down the same path as RV youth, which as you know talked about this multi year replenishment cycle.
And that was ultimately pretty quickly condensed into a couple of quarters. So maybe maybe speak speak to that idea.
Yeah, I think we're in a very very different place to the industry I won't attempt to speak for the RV industry, but obviously.
We follow what's going on there.
But I would say that we are continue I mean, if you looked at the data, even though what 55% down on.
2019 globally with more than 60% down in the U S, which means boat availability continues to be very.
A constrained although we're building some inventory in some segments.
We're not building fast enough to create that issue I would say, it's very clear that in.
Broadly in the fiberglass segments, probably I think pontoons, we're talking about still talking about 24.
For a normalization of our pipelines.
It's possible that it might be a little earlier and and aluminum fish for example.
But it's our inventory levels are still very low so we would take a lot to rebuild so I would say the thesis is pretty intact, just a bit more nuanced maybe by segment.
Got it it makes a lot of sense. Thanks, guys.
Our next question comes from Kevin Heenan with J P. Morgan. Please go ahead.
Hi, Good morning, guys. Thanks for taking my question.
Hum.
Wanted to ask on the propulsion segment can you just talk about the visibility you have to the demand for the new production. That's coming on later this year in terms of new Oems lined up or lines of business that may have been underserved.
As well as the margin impact of that new product that's coming online.
Thanks.
Thank you very much great question, we have very high visibility.
Extremely high visibility down to an OEM and every other level on where that additional capacity will be dispositions.
We are genuinely extremely excited to get that capacity on board.
I mentioned, we mentioned in the calls that although we have focused a lot of our commentary on.
The U S market, we are gaining share very quickly elsewhere.
I'll be surprised because we crossed 50% and in Canada pretty soon we're building in all the European markets.
Australia, New Zealand, we continue to be extremely strong.
So that capacity has a lot of.
Clear destinations not only in the U S, but internationally too and.
Generally the margins will be strong.
Normally for billing.
These new Oems and international Oems, which tend to have higher margins.
So give us the capacity to really get after the Repower channel and the commercial channels, which are generally extremely strong margins. So.
The additional benefit.
Every unit of capacity, we'd get out is not only the value of the unit as the incremental <unk>.
And associated with marginal units.
Alright could not I cannot wait to get that capacity online there'll be a very exciting time for us.
Okay.
Great and if I could just quickly follow up on the P&A side.
You said that July had improved.
Do you see that business up on an organic basis in the third quarter.
And any change to that I think the full year outlook had embedded mid to high single digit organic growth figure.
How do you see that today. Thanks.
Yeah, Kevin I'll take this one yes, I mean, we went in we would anticipate.
Growth in the back half organically listen this is really a tale of differ.
Different corner now the first quarter. So the first part of the quarter really was slow because of weather.
And it certainly accelerated in June and we're seeing that in July .
When you say DNA, when we say P&A theres really distinct buckets that you've got to look at.
Shouldn't DNA, which is the most profitable section of our P&L and the U S was actually up quarter over quarter slightly but up even despite the poor weather.
Naturally that that business suffered a little bit more from freight delays and some supply chain issues, but in the U S that that business remains strong.
The distribution business, which has gotten probably a little bit more attention than necessary.
This morning, you know remember that's just a third party distribution business. So we you know we on sell the product from from companies that use our network because we have such a global network.
And frankly, there were several core customers that were struggling to get products out to us in the quarter and obviously that means we can't afford them along that business, although for our distribution business at almost 10% operating margins is a fantastic business.
When you look across the landscape of <unk>, it's still relatively modest from a earnings standpoint.
The last thing I would say that the S. G advanced systems group business as the core businesses. The legacy businesses, that's basically everything not an avocado.
<unk> also had a really strong quarter for the OEM side, particularly.
And then <unk>, obviously did continue to do well.
Well so.
That we are not concerned at all about the usage pattern still remained very strong and I think youll see in the back half of the year, some really nice results.
That was a great commentary one other thing was.
It's kind of a big box retailer and online.
Retailers have normalized that stocking patterns, but they they were they had a lot of safety stock.
And we have worked our way through that now so orders are flowing again from the big box retailers and online retailers and we're seeing that coming into that essentially issue resolved itself at the end of last quarter.
Okay. Thanks, very much guys.
Thank you.
And our next question comes from Anna Glass Chin with Jefferies. Please state your question.
Hi, Good morning, Thanks for taking my question earlier in the script you talked about how.
Any moderation in the back half of the year and inflation would be factored into pricing strategies.
And then what you're saying here, maybe you know pricing increases, but not right now that's been placed moderate.
Okay.
Yes, certainly so yes, I mean, we essentially have been pricing to cover inflation.
Some time now.
Obviously, we're a long term player in the industry, we don't want to see prices increase.
Drive people out of <unk> or any other sector in which we participate so.
Our plan is to continue to cover inflation, but with hopefully some moderation that will allow us to moderate pricing as well, we still plan to cover inflation now.
And that is baked into our.
Forecasts.
Great. Thanks.
I'm turning to freedom.
Membership growth was even higher than the same quarter.
One on <unk>.
Can you talk about what.
Do you think that keeps up with here is that.
Gareth greater.
Oh, yeah, sorry about that.
So the norm.
Region right.
Well, what do you think the key driver there is.
So I think you know awareness is there.
Definitely a drive lots of freedom Gab I don't know if I can't remember the last week that I didn't see a news story on our freedom location of freedom as the entity. So.
So broad awareness has been growing significantly and I think the the benefits of the freedom model to get people on the water, particularly those people who are time constrained.
But maybe about the commitments that don't allow them to.
Some of the other parts of boating.
It's just become.
More obvious to people the benefits of the model certainly we.
We are refining the model and making sure that as we grow we're keeping our service levels intact enhancing the brand enhancing the boats getting more diversity of boats.
Into the various tweets so.
We're doing everything we can to make the experience more attractive and then awareness is growing really quickly.
And as I mentioned recently, our searches for football club or even higher this year than last year.
If you look across.
Full range of both metrics that's that's not.
That's a pretty nice situation to be in.
Great. Thanks, David.
Thank you.
Our next question comes from Fred Wightman with Wolfe Research. Please state your question.
Hey, guys. Good morning could we just go back to the PNA segment, it looks like there's a pretty big.
Margin improvement embedded in the full year outlook, even though that full year number came down can you just explain sort of what's driving that and what gives you that confidence as we look into the back half.
Yes.
Yes, I'll take that again.
So we we've taken out a lot of inflation in the first half I think that.
We've talked about that on most calls and we.
We believe some of that is going to moderate here as we as we come to the back half.
The year, there's also some mix componentry in there.
As we as we look at the back half volumes in the second half are generally a little bit lower just by nature of its kind of a year in and year out.
But that.
That's a factor as well.
Some of our pricing was.
Mid mid mid May pricing. So we did not get the full impact of pricing in the quarter, we will get back to as we go into Q3 and Q4. The last thing I'd, probably mention as <unk>. Some of the cost synergies that we've been looking to put in a well, we'll give a little bit more benefit in the back half and certainly into 'twenty three as well.
<unk>.
Okay. That's helpful that makes us that makes sense. If we just look at the repurchases I think there's a comment in one of the releases are materials talking about similar levels in <unk> versus <unk> and that would seem to imply that you'll be pretty close to that $400 million number I mean is should we view that as sort of a floor type number and sort of how do you figure out approach.
This is in the current environment going forward.
Yeah, Fred what we've given ourselves plenty of flexibility as we as we continue to see the dislocation not only in our own stock price, but in the sector itself.
I would I would tell you did 400 is.
Certainly.
Likely to happen and we have the flexibility to go higher than that.
Should we do more in the third quarter should valuations be be appropriate for that.
Perfect. Thank you.
Thank you. Our next question comes from Scotts number with MK and partners. Please go ahead.
Good morning, and thanks for taking my questions.
Good morning.
David.
In your comments, you talked about not seeing any wholesale.
Cancellations on the boat side and apparently the consumers holding up a lot better than expected at least in your world, but can you talk about trends that you're seeing are people with rates going up interest rates are they just are.
Switching more towards cash and if so what's the percentage of cash purchases this quarter.
Yeah, I don't actually know what the percentage of cash purchases. This quarter I do know because I looked at the first couple of weeks of July the financing applications in July this year essentially identical numbers that we see anyway.
Two last year.
Would say that you know.
Credit spreads have certainly increased.
And.
The duration of loans, it's probably gone up.
We I was at a dealership looking at a 20 year plus loans on various products. So people I think are accommodating there kind of a monthly payment.
<unk>.
Tolerance by looking at various means including extended loan periods.
And yeah, I mean, it clearly is differentiate most of our applicants that we see a prime applicants.
So the.
I was looking at the kind of prime to non prime credit quality. This year, it's pretty similar to last year too.
There may be some people using.
Using cash and I think that's probably more likely in the ironically in the.
A more premium segments.
When people are doing that.
So yeah, we haven't seen a lot of change.
Change and even though credit spreads have increased people seem to be relatively tolerant to that.
If we do see something that's more likely to be in the value segments.
But so far though.
Sold them up pretty well and certainly premiums holding up extremely well.
Yeah.
Great and just a follow up quick question. Ryan you talked about 10000 units are I guess being shipped in the quarter, but.
For the full year or are we still on track for I think the number was 40000.
Yes, I think it will be will likely be just shy of that.
We'll probably be closer to 39.
We did 90 for the first quarter, where we did just over 10.
The back half as a reminder to everyone has a bit of calendar <unk>. We have some factory shutdowns that obviously the holidays in the fourth quarter. So you do have fewer production days, but I think 38 39000 still a really good number.
Great. That's all I have thank you.
Thank you.
Our next question comes from Mike Swartz with true Securities. Please state your question.
Hey, guys. Good morning, just wanted to dig into the P&A business I'm, just a little confused with some of the commentary on the on the guidance, which you you've lowered so I'm just.
Wondering I mean, the seasonal part of the business you know the boating season started a little slower I would assume most of that comes back later in the year. So is the guidance reduction more on the distribution business or I guess, how should I think about that.
Yes, Mike It is a lot.
It is heavier weighted towards the distribution side of things.
It's also a little bit odd that that put aside as Dave said earlier about the restocking patterns at retailers, but unfortunately to your first comment if you do lose a turn of P&A do.
Due to a later season you you often just lose it for the season.
If you don't get boats in the water until mid May or end of May versus same time at April it's it's unlikely to get that back. The good news, though is PNA backlogs continue to be very strong.
Supply chain still is there as well.
And so we're dealing with some of that but all in all it's kind of nits and nats in the various places, but certainly it's not a function of usage kind of from the start of the better weather for it through the year.
Gotcha, and I think David you made the commentary around some of your aluminum fishing businesses, how you allocated more of the production towards premium pre.
Premium models is that.
I guess is that being driven by what youre seeing consumer demand a lot of us are hearing out there obviously the value end of many of the power sports recreational markets are softening to a greater degree than maybe premiums. So is that just a reaction to that or or something else strategically that you're doing internally.
Yeah, I think a couple of thoughts really it's I would say, it's mostly strategic I would say obviously, where.
On a multi year process of expanding both margins and so we want generally produce higher margin models.
In a supply constrained environment, which we've been generally operating in if you have one of something whatever it is it's better to put it on a high margin model.
And a low margin model and that could be in an engine the windshield.
Our control.
So protecting our high margin models has been.
The priority for us.
I'd also say that for the last three years.
I've been saying that.
We are not going to fight for every last unit of aluminum.
<unk> product.
We are.
On a multi year course of elevating our boat margins that area of the business is more populated by a lot of.
Smaller players some of whom have come back online after being.
Offline due to supply constraints last year, they were less robust.
So we're just being cautious about making sure that we continue that margin journey and don't spend a lot of.
The constrained supply chain parts on that portion of the business.
And Mike maybe one more I circle back and while we were trying to avoid.
Talking FX too much on this call, but if I look at the back half of P&A sales made half of the impact.
FX for the year is related to P&A about half propulsion have P&A.
$140 million sales impact. So you know right. There is several points so still a number of factors, but well still showing good results regardless.
Okay, great. Thanks for that color Ron I appreciate guys.
Thank you.
Our next question comes from David Macgregor with Longbow Research. Please state your question.
Good morning. This is Joe Nolan on for David Macgregor.
Hey, Joe.
Hi, I just had a sort of a follow up to the prior question, what you're focusing on.
More of a premium product could you just talk about the pace of orders and how.
It's split between a lower priced boats versus premium products.
Yeah, I think you know orders wholesale orders are very strong across all of our boat brands at the moment, there isn't a dealer who doesn't want more boat brands doesn't really matter what the boat type is.
So we continue to do everything we can to try and satisfy that demand.
I think the although the supply constraints are being felt somewhat more acutely in the premium end of the business as I mentioned earlier, even the.
Aluminum fish ended the business dealers are well below their normal stocking levels.
At this time of year. So yeah, our orders are holding up very nicely.
Got it okay. Thanks for that and then just a quick follow up Mercury seems to just keep gaining share can you talk about some of the areas, where you're having the greatest success, whether that's buying horsepower type of boat or by geography.
Thanks.
Everywhere, it's the answer at the moment, but I would say.
We focus, particularly on the higher horsepower, but not to the extent that we don't do a lot of work in every segment.
As we noted we just introduced a brand new.
25, and 30 horsepower engine, which takes some of the technologies that we introduced in the higher horsepower segments. So migrates it downwards, though.
Making sure our product line is robust from top to bottom but.
But I would say that.
We're still the only manufacturer that has any prada.
Product even above 425 lost time, we have a full 50, we have a 600, we have a 500.
So there isn't even any competition to us at the top end of the horsepower range.
Demand for our high horsepower a midrange is still extremely strong.
I think we've shown to be a very reliable.
Supplier.
And that is benefiting us pretty much everywhere as we get more capacity. It is all allocated.
Two.
New Oems expanded market share or share of transoms than existing Oems Repower international markets. So.
There is no reason why our share gains cannot accelerate once we get that capacity up.
Great. Thanks for answering my questions.
Thank you.
Our next question comes from Joe Alpha Bello with Raymond James Please state your question.
Hi, Good morning, I guess staying on for a second you mentioned the capacity expansion coming online. This year later this year, it's about 50% Oh here 175 horsepower and above I guess the.
Two questions there one what percent of your engine sales does that represent in terms of dollars and when would you expect to get the optimal utilization levels with this new capacity.
Hey morning, Joe I'll take this 150 horsepower and above it's about 60% of them.
And below a 150 horsepower is about 40% so.
The fact, the swing factors is the $1 50, which is obviously a big volume. So you can imagine that if this represents half or maybe a little bit less.
The of the overall revenue of.
Mercury's propulsion business.
Then in terms of full run rate I mean, this is obviously not a light switch you will see benefits in the fourth quarter, certainly I think as you look at the guidance one of the reasons, we took propulsion sales guidance up is.
Is the is the capacity coming online in the fourth quarter and then will continue really into next year. So whether it is Q1 or Q2 of next year.
When youll see the full run rate a bit of it does depend on supply chain and suppliers and to this point they've been great partners as they always are to mercury, but that's what I.
Think about the full run rate kind of mid next year.
Very helpful. And then maybe for Dave just to clarify your comments earlier on the call on pricing or are you, saying, we could see a moderation of price increases as cost inflation or could we even see some roll back.
Of recent price increases.
Input costs actually do come down.
No I was saying.
Former that we will see.
Hopefully the opportunity to selectively moderate.
<unk> obviously.
Inflation pricing price inflation has been.
Higher than normal for some time now.
We're very cognizant of that I do not expect any price rollbacks.
If we if we.
Needs.
Need to stimulate demand.
Don't at the moment, but if we did it would be more likely through promotional activity not a not a rollback.
Okay. Thank you.
Thank you. Our next question comes from Craig Kennison with Baird. Please state your question.
Hey, Thanks for squeezing me in here Ryan you made.
Going on FX and that points well taken in terms of impact on the income statement I'm. Just curious has there been an impact on the competitive dynamic in motion category.
But we don't we don't believe so Craig but obviously.
Overtime in any of our non U S competitors there their pricing is.
They're obviously their responsibility and we just we can't comment on on anything they do on price, but to date they have not we've not seen any material changes.
Great Hey, thanks for the call.
Thank you.
Thank you.
And we have run out of time for questions. Today at this time, we would like to turn the call back to Dave for some concluding remarks. Thank you.
Thank you very much. Thank you all for joining us today I think this quarter once again demonstrates the <unk>.
Evolution about business and our ability to continue to perform strongly and advance our strategic initiatives even in the face of many headwinds.
The improving retail data at the end of Q2.
So demonstrates the resilience of the boating consumer and I think in early July we're seeing P&A rebound very nicely in a way that suggests that boating consumers is very very active.
We innovate on behalf of that consumer to offer the best boats engines experiences alternative ways to participate.
And we are very much looking forward to sharing more detail on that with the investment community in November this year when you will see.
I expect the most exciting array of new products that you have ever seen.
We will look forward to sharing that with you later in the year.
Thank you.
And that concludes today's conference all parties may disconnect have a great day.