Q3 2022 Brunswick Corp Earnings Call
Good morning, and welcome to Brunswick Corporation's third 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 Niihau Clark Senior Senior Vice President Enterprise Finance Brunswick Corporation.
Good morning, and thank you for joining us.
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.
Let's keep in mind that our actual results could differ materially from these expectations.
Telephone these factors to consider please refer to our recent SEC filings and today's press release.
All of these documents are available on our website at Brunswick Dotcom.
During our presentation, we will be referring to certain non-GAAP financial information reconciliations.
Reconciliations of GAAP to non-GAAP financial measures are provided in the appendix to this presentation and the reconciliation sections of the unaudited consolidated financial statements accompanying today's results.
I'll now turn the call over to Dave.
Thanks, Nate and good morning, everyone.
We delivered a record third quarter with $1 7 billion in net sales and almost 290 million of adjusted operating earnings.
Continuing our trend of exceptional resilient performance in a challenging macroeconomic and supply environment.
These results were achieved despite an extremely difficult end to the quarter for many of our Florida employees in locations as a result of the impacts of Hurricane Ian.
All of our divisions contributed to this strong performance with many new products sustained cost control and a continued focus on operational efficiency.
Together with the benefits of capacity investments in Acs initiatives driving growth across our businesses.
Consumer demand for our products remains resilient with bulk field inventory levels getting healthier, but remaining nearly 40% lower at the end of the quarter versus the same time in 2019.
Our boat and engine production levels remain generally on track and the percentage of all boat production, but it's already retail sold continues to be high.
Especially for our fiberglass brands with no evidence of wholesale cancellations.
Mercury continues to capture market share with gains slightly to accelerate in the coming quarters due to a major new product launches and the completion of the capacity increase and the phone the Lac, Wisconsin, some production facility in the coming months.
P. A nice sales benefited from acquisitions completed in 2021, well Freedom boat club saw significant overall on a same store membership sales increases in the quarter.
Okay.
As the economic outlook continues to create overall market and sector dislocation, we executed $140 million of share repurchases in the third quarter, bringing.
Bringing our year to date share repurchases to $360 million.
And we plan to continue an aggressive repurchase schedule as we close out the year.
Prior to discussing business segment performance I will share an update on hurricane and.
At the end of September southwest, Florida experienced Ian as a category four hurricane.
Brunswick has a strong presence in Florida with multiple manufacturing sites distribution locations, our freedom book couple of locations.
We closed our Florida manufacturing facilities for the last week of the third quarter to prepare for and ride out the hurricane.
The facilities incurred minimal damage, allowing for manufacturing and shipping operations to resume in the following weeks.
Only one distribution location remains out of operation.
Many dealer locations in Florida stopped preceding product ahead of the hurricane and some dealer locations in the most impacted areas.
Significant damage to property and inventory.
Freedom Boat club operations in southwest, Florida was significantly impacted by ear.
With over 100 boats sustaining major damage and five locations unlikely to opine until 2023.
But most of the most impacted locations are able to pause that memberships until 2023.
As they manage through this difficult period, and we restore operations.
From an employee standpoint, approximately 20% of our employee base resides in Florida.
Some in the most impacted areas with significantly personally impacted.
Brunswick is providing critical relief supplies and pay to employees and the communities as they rebuild and recover.
<unk> through activation of a Brunswick employee relief fund.
We estimate an approximately $25 million full year revenue impact of Brunswick as a result of the disruption to our facilities teams and customers caused by Hurricane Ian.
More than half of that impact in the quarter.
In the medium term following rebuilding and insurance recoveries, we may receive ode its foot boats to replace those lost in this event.
Yeah.
Turning to other external factors, despite an improving overall trend in supply delivery and cost inflation compared with the worst period of supply chain constraints, we continue to manage through some discrete but impactful shortages most.
Most recently due primarily to continued labor shortages.
U S supply of facilities.
This quarter, our propulsion business with notably impacted by a couple of supplier issues, which slowed production of some products and led to nearly 2500 midrange outboard engines awaiting one component for completion at the close of the period.
Situation, we expect to resolve in Q4.
Despite these challenges the propulsion business delivered outstanding performance, which I will speak to further in a few moments.
And see what boating activity remains strong with a warmer September and many parts of the U S extending the boating season.
Well buying activity in the year round markets remains strong the boating season in the northern market is coming to a close.
With the uncertain economic conditions and high interest rates, we expect to see some buyers in these markets deferring late season off season purchases until the start of the 2023 season.
This impacts mainly aluminum products.
From a dealer standpoint, while our channel partners have shed concerns related to macro factors.
Inventory refill remains that called focus and they are excited about our many new products. So we continue to see forward orders and backlogs in line with historical levels.
Turning now to segment performance during the quarter, let me highlight again that we delivered a record third quarter with each of our segments driving quarterly topline improvement versus 2020 one.
Our propulsion business continues to deliver exceptional results with 14% top line growth versus third quarter 2021.
Table by highest sales volume, resulting from strong global demand.
The increases in market share gains.
During the quarter Mercury Marine gained 100 basis points of outboard propulsion retail market share in the U S and continues to capture share in international markets as recently seen in the can boat show well.
<unk> had a record 65% outboard share on the water.
As I've mentioned, the outboard engine capacity expansion at the funded like Wisconsin facility is on track to come fully online towards the end of the year.
Our parts and accessories businesses delivered strong sales growth led by benefits from acquisitions completed in 2021 solid engine P&A sales and strong OEM sales from <unk> group.
On an organic basis P&A segment sales in the third quarter grew 1% compared with 2021, excluding currency.
Medical group experienced retail point of sale activity above 2021 levels during the quarter, but continued to see slowness in retailer and distributor restocking, which impacted wholesale sales.
Our boat business posted another robust quarter with topline growth of 27% and double digit adjusted operating margins for the second consecutive quarter.
Each product category posted solid topline growth, despite a florida boat manufacturing facilities being closed for the last week of the quarter due to hurricane and.
Additionally, our aluminum fishing and recreational fiberglass brands delivered operating margin expansion compared to prior year.
Finally freedom boat club had record same store membership sales increases in the quarter. Despite the southwest, Florida operation has been significantly impacted by Hurricane Ian.
Yeah.
Freedom continues on its growth trajectory in the U S and Europe and now has more than 360 locations nearly 54000 membership agreements covering 84000 members network wide and a fleet size above 5000, Boes, all while generating exceptionally strong synergy sales across our marine portfolio.
I will now provide an overview of sales performance by region on a constant currency basis, excluding acquisitions.
In the third quarter, all regions delivered substantial sales growth versus third quarter 2021, with broad based gains across the business segments.
Overall international sales in U S sales, but each up 13% versus the prior year quarter.
Additionally, on a year to date basis sales have increased 11% compared to 2021 on a constant currency basis, excluding acquisitions with growth across all business segments.
Finally, we anticipate further propulsion share gains across the regions as we were able to service a backlog of demand and high horsepower outboard nodes enabled by the additional capacity coming online by the end of this year.
From an industry view U S third quarter retail unit sales improved sequentially from the first half of the year.
The main powerboat segment was down 5% versus the third quarter of 2021.
On a year to date basis. The main powerboat segment was down 14% versus 2021 and about 7% versus 2019.
Yeah.
Outboard engine industry data remains favorable as the third quarter of 2022 increased 10% over the third quarter of prior year.
Mercury performance. During this period was very strong as we gained overall market share in each of the last three months and over 400 basis points 200 horsepower and greater outboard engines over a three year period.
Brunswick retail unit performance in the third quarter was broadly consistent with the overall market performance with outperformance in recreational fiberglass products premium pontoons and underperformance in value aluminum, while lower consensus value boats, mainly from smaller manufacturers.
Gained share loss in 2019 and 2020.
We continue to focus successfully on margin maintenance and expansion and shifted production to higher margin product lines at the recent expenses some unit share of value aluminum product.
I'll now turn the call over to Ryan for additional comments about financial performance.
Thanks, Dave Good morning, everyone.
Project delivered an outstanding third quarter with record sales operating earnings and EPS for any third quarter on record.
When compared to prior year third quarter net sales were up 19% with adjusted operating margins of 16, 4% up 90 basis points.
Operating earnings on an as adjusted basis increased by 26% and adjusted diluted EPS of $2.67 increased by 29%.
All segments delivered sales growth, resulting from solid demand new product performance and pricing implemented since the third quarter of 2021.
Partially offset by unfavorable changes in foreign currency exchange rates the impact from Hurricane D N a.
And supply chain challenges.
The strong operating earnings growth was also enabled by these factors together with benefits from cost containment measures tempered slightly by continued elevated material and freight inflationary pressures.
And spending on growth initiatives, including capacity expansion Aces and new products.
Note that changes in foreign currency exchange rates were more unfavorable than anticipated, resulting in a high single digit million dollar earnings headwind in the quarter with the PNA segment most impacted.
On a year to date basis, rather it has also delivered record results, including over $5 2 billion of net sales almost $850 million of operating earnings and $8 <unk> of adjusted diluted EPS.
Youll note that we continue to show 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 third quarter of last year, which was the previous best third quarter in company history.
Turning to our segments, our propulsion business delivered yet another quarter of outstanding top line earnings and operating margin performance.
Revenue increased 14% versus the third quarter of 2021 at higher sales volumes are driven by strong global demand capacity increases and market share gains around the globe.
Operating margins of 20% or up 210 basis points and operating earnings were up 27%.
Enabled by increased sales and lower operating expenses, partially offset by investments in capacity and product development.
As a reminder, the pre.
We discuss capacity expansion at the find of like Wisconsin facility will add more than 50% capacity in the 175 horsepower and higher categories, which will be critical in driving future top line and earnings growth together with market share gains.
This expansion will also enable the production of new outboard engine products and if he joined US in Florida for our Investor event on November 16th I'm guessing you may get to see these in action.
Our parts and accessories business saw a 19% increase in sales due in large part to the 2021 acquisition of <unk> reliant and <unk>.
Excluding the impact of acquisitions and currency organic P&A revenues were up 1% against a very strong 2021 comparison and were up significantly versus the third quarter of 2019.
U S engine P&A and sales to Oems were up again quarter over quarter, while sales in our lower margin distribution businesses continue to be negatively impacted by third party products availability and hurricane.
Which constrained sales at the end of the quarter.
DNA sales to retail and external distribution outlets, including sales from Napa co remain depressed at these channels further slowed restocking levels. Despite point of sale retail demand remaining healthy.
Operating earnings were down very slightly against Q3 of 2021, given all the factors previously mentioned with the sales benefits being offset by the negative currency impacts and continued material and freight inflation.
Yeah.
Our boat segment had another fantastic quarter, delivering strong top line and earnings together with double digit operating margins. Despite continued supply chain disruption and having to shut down there are three main Florida facilities for the last week of the quarter to support our employees.
That's hurricane Ian made landfall.
The boat segment reported a 27% increase in net sales.
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 inflationary pressures and the loss of production from Hurricane Ed.
The entire enterprise continues to benefit from the strong synergies across our portfolio with an average of $25000 of content per boat now source from other Brunswick brands.
Freedom Boat club, which is included in business acceleration contributed approximately 7% of the boat segment's revenue during the quarter.
However, as Dave discussed earlier freedom had at southwest, Florida operations materially impacted by Ian and will be working diligently for several quarters to rebuild boat and slip availability in the effected locations, while working with our members to protect their memberships, while they sort of recovery from the storm.
Turning to pipelines, we produced more boats in the third quarter than we did in the third quarter of 2021, allowing for healthier inventory levels in the hands of our dealers.
However supply chain inefficiencies continued to result in delayed components, preventing us from maximizing production across our footprint.
As of the end of the third quarter. There were approximately 12000 units in dealer pipeline inventories around the world down 39% from the same time of the year in 2019.
This translates to just over 19 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 with just over 7000 units available or 16 weeks on hand.
We anticipate the end of the year pipelines to remain thousands of units and several weeks on hand below historical averages.
We thought it would be also helpful to dive a bit further into pipeline levels focusing on the current availability of fiberglass product versus aluminum product in the U S.
At the end of the third quarter. There were approximately 5000 units of aluminum product in the hands of U S dealers or 19 weeks on hand, which although trending healthier remains almost 40% lower from the same level in 2019.
The primary retail season for these products is materially complete with our dealers for these boats mainly in northern markets focused now on winter rising product and getting their inventory position ready for the 2020 to be selling season.
However, the pipeline for our fiberglass product, which mixes up in terms of price and margin remains at significantly lower levels in 2019.
There are nearly 2000 fiberglass boats and U S dealer inventory almost 60% lower than in 2019, which as you may remember included the period, where we were purposefully minimizing Boston whaler pipeline ahead of product launches planned for early 2020.
The percent of sea Ray and Boston Whaler models already retail sold coming out of our facilities remains elevated and there was no reasonable scenario by which we have normalized level of fiberglass products in dealer inventories during the 2023 retail selling season.
Finally note that we have completed our model year 2023 dealer meetings with strong wholesale orders continuing for the upcoming year.
Yeah.
Moving to our outlook for the remainder of the year. We believe our continued strong operating performance will deliver a record year. Despite the continuing unfavorable FX environment inflation and supply chain headwinds.
Our updated guidance anticipates, a full year EPS of approximately $10 per share, which would be more than 20% ahead of 2021.
On revenue of approximately $6 $9 billion, which would be more than 15% better than 2021.
The change in the EPS midpoint versus July is related to the unfavorable changes in FX rates and the impact of hurricane and partially offset by continued accelerated share repurchases.
Note that the updated guidance for both revenue and EPS with land ahead of the midpoint of our initial full year guidance from January .
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.
We have mentioned foreign currency exchange rates several times on the call and we now anticipate a $45 million to $50 million full year earnings headwind due to the changes in FX rates, primarily related to the strong U S. Dollar.
Note that changes in FX rates impact all facets of our results, including a negative sales impact in excess of $175 million for the full year.
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 $360 million of shares year to date, and now anticipate repurchasing $450 million of shares for the full year again increase of $15 million from our previous estimate.
This will result in our average diluted shares outstanding for the year to decrease to approximately 75 million shares.
Our operating performance together with continued capital strategy execution.
<unk> in an all time high of more than $550 million of capital returned to shareholders in 2022 through share repurchases and dividends alone.
Lastly, we remain keenly focused on generating free cash flow with the decrease in our full year estimate to approximately $250 million being a direct result of higher raw material and web inventory balances needed for production continuity.
The impact of changes in FX on our international earnings and slightly lower full year earnings.
We anticipate working capital usage to moderate as we work through 2023 with free cash flow improving accordingly.
I will now turn the call back to Dave for concluding remarks.
Thanks, Ryan closing out Q3, we've already received almost 90 awards, recognizing exceptional product business and individual performance across our enterprise.
Wanted to share a few highlights.
Earlier. This month Brunswick was named by Forbes list of the world's best employers.
Third consecutive year.
Brunswick ranked in the top 15% of all recognized organizations and ranked in the top 10 companies in the world within the engineering and manufacturing category.
Recently, we were named the most innovative marine company in 2022 by Soundings trade only magazine.
Simon the last four years that we've received this recognition.
Additionally, on your Denari above group President was named by Boating industry magazine as its 2022 mover and Shaker of the year.
This is the third consecutive year, the Brunswick, because one well I had a final is for this honor.
And finally Mercury Marine accepted a business friendly environments Award from Wisconsin Chamber of Commerce Manufacturers Association.
The award is an acknowledgment of Mercury's continued sustainability leadership, particularly recognizing progress in adopting renewable sources of energy and.
Implementing energy efficiency production processes.
Using recycled aluminum die casting operations and using returnable reusable packaging.
The third quarter was also characterized by a number of business expansions and important new product releases.
Last week Mercury opened its new purpose built and highly automated distribution center to further expand its industry, leading parts and accessories business.
The new 512000 square foot facility is strategically located near Indianapolis, Indiana, a major transportation hub.
And we will significantly improve P&A delivery times to domestic and international customers.
At the end of the quarter. The NAPCO group launched a significantly enhanced version of its fathom E power system.
Integrated lithium ion auxiliary power management system.
Delivers reliable power and unparalleled performance for the marine and RV sectors.
Placing conventional combustion engine generators.
The <unk> system offers advanced digital controls and monitoring of power consumption.
Expect to see these systems on a number of boats at 2023 boat shows.
Also earlier this month, we launched the heyday H 'twenty surf boat the builds on the success of the multi award winning 822.
Hey, Dan it's been the fastest growing wake surf brand and the 2023, H 'twenty, which features a mercury marine engine and advocacy group controls and displays is designed to capitalize on that momentum.
<unk> also launched its brand new <unk> 260 <unk>.
This is C rates first crossover wake surfing and cruising boat model that also features Mercury Marine SKU forward facing Bravo self drive technology combined with NAPCO groups of controls and display.
Finally freedom boat club continues to expand locations and added locations in new countries in Europe , as well as new U S locations during the quarter.
Before I close I'd like to remind you about our November 16th event for the investment community, which we are hosting at our famous latex test facility outside of Orlando and Florida.
We will be demonstrating an unparalleled array of recently released products and technologies from across our businesses and showing some very exciting unreleased products that support our next wave in acis strategies.
Thank you for joining the call that concludes our prepared remarks, we'll now open the lines for questions.
Thank you at this time, we will be conducting a question and answer session.
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Please ask one question and one follow up question and then re queue for any additional questions.
Our first question today is from Kevin Heenan of J P. Morgan. Please proceed with your question.
Oh, Hey, guys. Thanks for taking my question.
I guess I'm just.
On the propulsion segment can you elaborate on your confidence in the accelerating market share gains you see in the coming quarters.
Between the new product launches and capacity expansion.
What's the latest on the competitive environment that you see today how.
How do you feel pricing wise relative to peers and looking to next year, I guess relative to the 8% multi year growth you've laid out how best to think about propulsion relative to that given the benefits you see landing in the fourth quarter of this year. Thanks.
Thanks, Kevin we're very confident in continued market share gains by Mercury, we just.
Yesterday.
<unk>.
Fort Lauderdale boat show that just started yesterday mercury has something around 56% share of.
Engines on Trans subs, which is about three points up from last year.
That is ahead of some imminent major product launches in the high horsepower categories that we're very excited about.
So mercury's expansion is going extremely well internally in terms of getting everything ready and I think production will be up about something like 14% in Q4 versus prior.
It was last year on a unit basis and also getting the supply base ready obviously, that's the road that both major task, but I think accrued as usual is doing a super job.
A lot of cost to move.
Waiting in the wings.
To take that product so.
Momentum is incredibly strong you saw 65% share of cans and 56% share it.
Slopes on and those are new boats new models.
And ahead of major new product launches.
On the new capacity available so we're very excited.
That.
Obviously.
Conditions next year overall economic conditions are uncertain.
But mercury's growth is really very secular and people are still looking for the best product.
We're seeing in the market right now is a premium product.
<unk> fiberglass holding up very well being very resilient and that's where most of Mercury's high horse power.
<unk> go so I would say our confidence remains extremely high.
Great and just as a follow up Brian as you think about the different moving pieces and the and the macro backdrop.
Yes, how best to think about the progression of your EBIT margin on a consolidated basis next year relative to the targets.
You laid out in March.
Now would you expect to continue to move forward.
EBIT margin level and maybe some of the puts and takes to consider by the segments next year. Thanks.
Kevin That's a good question, obviously, we're putting together as we speak our plans for next year through the budgeting process that we go through annually.
Tell you Theres, a theres a range of scenarios for next year, they focus primarily on a flattish market.
That kind of a unit flattish market I.
Would tell you.
Our margin growth continues to be something that we focus on year on year out both.
On the cost side, which I think you've seen margins continue to.
Expand this year, despite headwinds such as FX and tariffs.
I would tell you David.
Planned today would be to continue margin growth each year of the plan to 2025, where whether that's 10 20 basis points or more is kind of dependent on a lot of the external factors FX being really the main one at the current moment.
We would not anticipate a plan where margins would go backwards.
Of the year.
Great very helpful. Thanks, guys.
The next question is from James Hardiman of Citi. Please proceed with your question.
Hey, good morning.
So I was going to start with.
Maybe.
Good morning.
I'm going to start with maybe an unfair question, but maybe you just answered it.
Marine Max said, they expected the industry to be down mid single digits somewhere between five and 10 next year.
It sounds like you think that that is too bearish of an.
Outlook.
Maybe just sort of initial thoughts there.
Yeah, you know I think we're exploring a range of scenarios James to be honest.
<unk>.
Span up to flat to slightly down obviously, we'll be preparing our cost structure.
For a more.
For a more bearish scenario, but in terms of core planning do you think.
Last year, the industry was down 8%.
Some of them decided something like that this year, it's probably going to be down mid teens based on where we are in the year right now retailers in the year right now.
So on a compounded basis down more than 20%.
So I think preparing for reasonably flat market still seems about the right thing for us it's certainly.
A bifurcated market.
With a stronger premium and strong.
Fiber glass.
Oh versus aluminum.
But you know I think it depends where the market ends up this year. Most most of it is not but I think compounded 20% down it.
It seems like a good place to start.
For all of next year, but.
As I said, we will certainly be.
Preparing our cost structure for something that is not is not as positive as that.
That makes a lot of sense.
Then sort of along those lines I mean, a lot of uncertainty here.
As we close out 2022.
How does that make you think about sort of the fourth quarter.
Shipment strategy right.
You talked about some customers are likely deferring into next year, we're going to be in our seasonally slow period.
How do you think then with all of those unknowns in mind.
How you want to finish the year in terms of.
Weeks on hand inventory or total inventories.
How are you targeting that.
For year end 'twenty two.
Yes for year end 2022 as you saw pipelines continued to be down significantly.
So we don't see a pace to moderate wholesale right now given the fact that we have dealers.
<unk> to look for.
Look for product and continuing to place orders So I think.
We will be looking at the end of the year and how we more about how we planned production for 2023, then how we.
Close out 2022, but we're not currently planning to.
Could sell wholesale shipments in this year and certainly.
One of the things that we didn't specifically mentioned above.
Hi, Blaine.
Incredible the freshness of it right now.
It's almost no 2022 model year product anywhere in any pipeline.
All 23 model year product.
So dealers don't have any aging inventory toll everything is very fresh and very relevant as they go into 2023, and obviously all we're shipping right. Now is 2023 monthly products. So, but we will be shipping is very healthy very contemporary.
Our inventory and he was really don't have anything that's aging top.
Got it thanks, Dave.
The next question is from Shiatsu of BNP Paribas. Please proceed with your question.
Hey, guys. Thanks for the question.
The story is the PMA business and how it kind of Brazilian.
Industry boat sale.
So you took down the margin guide for this year.
PNA, maybe it sounds like a lot of it is transitory, but maybe can you.
Parsed out how much of that is transitory factors and what gives you confidence in the <unk>.
The underlying business.
And margins.
It's a great question, it's one we obviously anticipated.
Being able to discuss a little bit less at its really two main factors one is FX.
And.
Unfortunately, the FX impact on P&A can't be understated. It said, it's just a big number it is over half of our FX impact for the year on the earnings and sales side and so that is really causing some pain. It is upwards to 80 or more basis points of the dike.
Klein this year. If you think if you think the PNA segments down 200 basis points from last year, which is the guide so that's about half of it is FX.
The lion's share of the rest is just a mix issue. It's obviously with the <unk> business see Medtronic and rely on coming on in the fourth quarter of last year. Those are businesses with very strong gross margins, but cost structure. It is that we need to get after and we are getting after to get those operating margins up.
To where the legacy <unk> business that is so you saw the announcement in August that the changeover to the name and the combination of.
A lot of cost out of that does not complete theres more.
Underway that will be coming so I would consider right now almost the trough margins for kind of an advocacy group and we look forward to continued growth and expansion even starting in the fourth quarter.
The last thing I would say its supply chain really really hampered P&A.
It's just taken longer to get product the freight is more expensive.
And that's shown through with.
With some of the margin pressure on the cost side.
Okay got it that's really helpful. And then maybe on the on the revenue side are there any other kind of data point I guess, you talked about the retail sell through but any other data points showing maybe.
Usage remained strong and consumers are not deferring any maintenance I'm trying to think more about the PMA, maybe it trips per member.
I our content for new boat.
Coming now.
Any.
Color on on the PMA drivers.
Especially.
Thanks, Tom.
Doug.
I think you pointed to a couple of the engine P&A sales I think on a constant currency basis.
Up.
Versus last year.
I think that's normally a good indicator of.
Healthy boating participation.
Freedom members are using that bodes very heavily so we're excited about that and membership growth.
Continues there so we don't really have any.
Indicators of kind of diminishing participation at the moment.
We're in a part of the season in the northern markets. The season is coming to a close so we will get a good idea about what translation efforts maybe through that but the two metrics that you alluded to I think both indicate continued strong participation.
Yeah.
Okay got it very helpful. Thank you guys.
The next question is from Craig Kennison of Robert W. Baird. Please proceed with your question.
Hey, good morning, Thanks for taking my question I wanted to go back to the first question I asked on the fond of lack of capacity expansion and really ask it in a different way.
Flat Marine market, which you described how many more engine units would you expect to sell due to the share gain you noted the repower market opportunity and some international opportunities as well.
Yeah, I don't know if you've ever specifically disclosed the unit share.
Opportunity, but the capacity.
The expansion dose double the potential.
Potential output.
So I would say.
For Mercury share gain and au pay associated with horsepower increases have really been a huge driver of Mercury's continued growth and success versus specifically bulk market expansion.
But we would continue to believe that to be the case, Craig. So I would say unit production will be substantially higher I don't think we've quoted a number yet but AEP will also be higher as we.
We migrate so higher and higher horsepower the new products. The word shortly introducing are in that category.
Do you think they are very attractive we think that they will.
Accelerate our share gains.
So we're very confident and substantial growth next year, even in a flat market.
Craig The one addition, I'll put out there in these numbers, we've given over time, but those three markets. If you consider saltwater commercial and Repower those global markets are multiple billions of dollars and so if we get our fair share like we think we well you can kind of back into what you think from a dollar.
Why is ours or our share wise, where we can get to.
Thanks, and then just to follow up on the engine side as it relates to currency.
What extent is currency a disadvantage competitively for you given some competitors are based in Japan.
We're continuing to when we were really pricing for our technology and product.
Features set Greg too so.
So we continue to price at a premium.
Across most of our product line to manufacturers and we use.
No so far seen any evidence of any abnormal behavior.
Market pricing.
Great. Thank you.
The next question is from Mike Swartz of Truth Securities. Please proceed with your question.
Hey, good morning.
Maybe start off with I think Dave you made some commentary coming out of the recent dealer meetings from a number of your brand just around the strong order pattern, maybe give us a little context or a little more color on what exactly that.
Yes, what it means is.
We have a kind of a trimester system of ordering with mm three times in the year the dealers place orders.
And we go through.
It's important to do that after the.
The dealer meetings, so the dealers experienced the new products.
Couldnt be delivered so.
I think we do.
If we it was 60 new products that we plan to launch you'll have already launched the majority of already this year they were extremely well received.
And so they are driving our order patterns are.
Consistent with prior years and consistent with what we expect.
So we have no indication of dealers.
Showing any kind of hesitancy with wholesale ordering pattern in this particular round of ordering which would essentially support.
Year round markets plus stocking for the for the seasonal market. So that's really the context, if you like.
Got you Okay. That's helpful. Thank you and the baby.
Ryan just a second question on Paulson.
The 20% margin this quarter, maybe help us think about going forward is that is that the right run rate, where there is some mix positives that you had in the quarter that we shouldnt expect to get any color on that would be helpful.
So I have to be careful because I know my president and CFO of Mercury are probably listening to this fall.
But yes, I mean, they still lever if you look at our if you look at our leverage change in sales over change in earnings they still lever up north of 20%.
And so there is certainly a case that that is achievable more often than not.
There were no kind of odd one off really in the quarter. There's always puts and takes I will tell you that the expansion project is close to completion.
Efficiency is probably improving better.
Better than we anticipated and the output is as strong and you combine that with the fact that the mix of products continues to mix up to high horsepower, which is our newer products, which have more cost taken out of them from the design process and you just kind of get a steady stream of margin growth there is a.
Reason, they've grown margins annually every year for the last decade, and we we plan to continue that trend over the next couple of years.
Okay, great. Thank you.
The next question is from Fred Wightman of Wolfe Research. Please proceed with your question.
Hey, guys can you touch on the European business and just the outlook. There I think that was up 15% in the quarter and you've heard some pretty scary macro commentary from other parts of the consumer landscape. So how should we think about that chunk of the business going forward.
Yes.
Yes Fred.
Please.
Surprisingly strong.
Definitely.
Strength in the Mediterranean markets.
Pad with some comparative softness in kind of Scandinavian some of the northern markets.
But in aggregate remarkably resilient I would say both on the engine side on the boat side.
So we.
We did a little promotional activity in the Scandinavian market place.
But really that's pretty much all we've done and.
Sales continued to be pretty good in fact remarkably resilient. So we're really not seeing.
Although its different country by country and I'm talking about Europe as opposed to markets like ANZ P&I P is strong as well.
But really.
Probably more resilient than we might've expected.
Also one of the places Fred that has not gotten their lions share of engine products that they would like and what the new capacity again coming online, we would anticipate our ability to satisfy more Oems and repower in Europe in 2023.
Understood and then Ryan you touched on the 'twenty to 'twenty five targets a little bit earlier, but have you changed your thinking about some of those downside scenarios that you touched on I think it was a $6 $8 number that you put out there any change to those figures.
What you show Fred Smart young.
No no change whatsoever, and just remind everyone. That's been around us for a while we do these three and now four year plans and they they know they are never linear but the results are never <unk>.
Perfect on a page were still very confident that we can get to where we told the world we'd be in 25, it may be a little bit bumpier than the front due to macro things that are out of our control, but we are still very much.
In support of our 2025 targets.
Yeah.
Great. Thank you.
Okay.
The next question is from Scott's number of M. K M partners. Please proceed with your question.
Good morning, and thanks for taking my questions.
Got it.
You guys made some comments that I guess for things like aluminum fish, you would expect some people to delay their purchases were placing orders.
Have you actually seen that.
Cancellation activity or is this just something you youre looking for.
Yes, we haven't really seen any cancellations what we have seen is the aluminum fishing is probably the slowest part of the market right now.
If you look across that satisfied data and our data youll see.
Pontoon actually remains strong, but aluminum fishing is the.
Is the weaker part of the market now that that tends to be more northern.
Kind of upward Midwest.
Product and that is obviously, the most seasonal part of our.
Our market so.
If you look at it how do you think about interest rates at the moment up until about two or three months ago.
Interest rates on boat loans, where roughly where they were in 2019 over the last two or three months the wind about 150 basis points.
So that obviously is a factor to consider on the positive side.
Gas prices.
Drop well below the highs so that's positive but I'm just you know.
As we work through who.
The explanation for what is why is aluminum fishing, a little softer you can imagine most.
People in that part of the market would be.
The buying the product.
They would use for a few weeks and then the way storage for five or six months before they use it again can you give the year.
That might have made sense when they thought that they might not get a product in 2020 and the next year and the next season.
But I think given the improving.
Improving pipelines and more product availability I think.
Some people are clearly going to make the decision that.
While it is likely to evolve.
Following season.
They may not choose to make the investment.
Put something away for five months.
So that is a.
I think a partial explanation of why.
Fishing market is softer.
Okay, and just one quick follow up you talked about for 'twenty three I.
I guess, an assumption of a flattish market for new bookshelves, but what about.
Propulsion and P&A and just consumables in general how would you expect that.
To perform.
It depends a little bit on what the weather patterns look like in the following year, but we have seen usage patents in 2022 much like 2021. So I don't think that's a lot of reason to suppose that they would be significantly.
Ah different we've seen through pretty much every.
Downturn that people continue to use that product.
So we would expect that to continue.
Next year, we also expect to see strong freedom.
Freedom participation.
So yes, no indications really I think that the things will be a lot different next year.
Got it thank you.
Yeah.
The next question is from Joe Alto Belo of Raymond James. Please proceed with your question.
Thanks, Hey, guys good morning.
Joe back to one.
If I go back to T N April 2nd.
Yeah. It was up 1% organic in the quarter I think back in July .
He described the month of July that's the only robust.
So it sounds like that business slowed a little bit throughout the quarter. I guess first is that accurate and then second you know why.
Retailers and distributors slowing the pace of restocking or is it just it's just macro concerns if it's not you know participation.
Maybe I'll talk about the last part of it Brian can talk about the first part yet.
So I think what we've seen is that and we've seen obviously as we've looked at results from other P&A companies.
Singly similar patents.
So one of the big box and online retailers some of the larger distributors.
During the period were maximum supply chain disruption really.
Stocked up.
You mean that that would be discounts.
This continuing seasons by now.
Now they are preparing themselves for just as we would for a more adverse conditions in the marketplace.
So destocking to where they more reasonable levels that they believe.
A relevant going forward.
Now, obviously over time retail and wholesale gonna have to come into balance.
So what we are seeing is where we have visibility which is mostly through the major retailers.
Retail sales are up.
But generally wholesale is trailing retail and I would say it's in the.
And a.
5% to 10% range. So wholesale is kind of 5% to 10% behind where retail is in retail is positive.
I think it's just retailers preparing for.
A potential of a blow of demand going forward.
And then Joel I'll give you, though I mean, there's really no magic here.
Do tend to try to avoid small sample sizes in maybe the July comp could have been one of those but there really wasn't a pickup or a slowdown there definitely if you'll remember this spring.
A little bit of slowness and as we came into July it hadn't picked up and so you saw sequential growth.
Just kind of from June and into July and August .
This is a business that when it's doing really well and you have to separate a little bit some of the recent times. We've had some explosions in of sales in certain quarters, but it's still up 30% from 2019, it's still up.
Large numbers as you kind of go back even further so no no slowness in the back half of the quarter. This is a business of kind of troubles around slightly up.
Given consistent participation and Thats really where we landed on a constant currency basis.
Okay. That's very helpful and maybe a follow up on the boat side is it still your expectation that you'll be refilling the channel throughout 2023.
I think so but that will obviously change by.
Segments.
As Brian said, it's hard to imagine a reasonable scenario, where we would be able to refill the fiberglass pipeline in 2023.
So that will.
Certainly extends to 2024, depending on what the market.
Conditions over the longer term look like I think there is a scenario where we could refill.
The aluminum pipelines through 2023, probably not in the first half, but maybe in the second half.
Got it okay. Thank you guys.
The next question is from Eric Wold of B Riley Securities. Please proceed with your question.
Thanks, Good morning.
Quick follow ups I guess, one on the P&A segment, obviously, you Rodney stressed.
Just how much FX has an impact on the top line.
The bottom line this year and expectations that.
Likely continues.
What can you do if anything to kind of offset that.
Have you taken twice.
To try to offset there or is that something kind of really don't want to necessarily do in this environment.
So we can and have taken price Eric I. Thank God. There is a kind of a level, where you don't want to go too far away and have people.
Delay our survey, so or not by the things that.
Did drive the driving the business. So we have taken price.
One thing that we should mention we have a very active hedging.
This year the company wouldn't and it vary.
Programmatic, who we are.
Yeah.
Believe it or not the FX impact would be double what it is without or without our hedging impact and that includes actually a.
Those of you that dive deep into our financials will see this week.
We get some cross currency swaps that netted us about $50 million to help offset its out of P&L then it's not a free cash flow of that but it's obviously cash in the door.
The Treasury team does a fantastic job of doing hedging and we'll continue that that practice, but.
This is where in unparalleled times, where the dollar is so strong and 30% of our sales are outside the U S and a good portion of those are denominated in non U S. Currencies. So we're doing the best we can within the guidelines but.
And taking price, but theres only so much we can do without <unk>.
To start with the underlying market.
That makes sense.
Follow up question I know you kind of talk about the.
The projections are targets for 2025, maybe the trajectory changes a bit in terms of being more bumpy upfront do you think the inputs or the assumptions or drivers you didn't change as well or what would get you there maybe more acquisitions in the non or something else do you think the resolve kind of assumptions around that or attack.
You may need to change.
I don't think we need to change anything fundamentally.
The path to 2025.
Assumed about 70% of revenue growth was organic including acquisitions that we'd already completed like medical and about 30% would be from additional acquisitions.
And I you know that.
Still seems reasonable I think a lot of the secular growth expectations remain in place, particularly for propulsion.
We haven't really not.
<unk> had an opportunity to talk about it much but novocure group is doing very well, particularly penetration into non marine markets. For example, which is also part of the thesis on bulk group. If anything is ahead of schedule. So I would say a lot of the inputs remains strong we continue to look at M&A.
But obviously at the moment.
Think about 'twenty five targets, including.
The 10 billion of revenue, but also including the roughly $70 of EPS obviously.
$450 million of share repurchases, it's very helpful for the EPS portion of that 2025 targets. So yeah, we're definitely adjusting capital strategy a bit but I would say that that is more <unk>.
Adjusting to the environment.
But we can get the maximum return.
As opposed to any fundamental change in in the past.
At this time, we would like to turn the call back to Dave for some concluding remarks.
Well. Thank you all for joining us for the great questions.
Really appreciate them as you've seen despite the very dynamic environment and the recent added challenges of Hurricane Ian.
Our businesses continued to perform very well there is no change to our thesis.
Overall, we had really strong margins in the quarter and notably book grew well into the double digits again, so our margins are really holding up well, despite FX and slightly lower revenue, which I think is a testament to the work we've already done on our cost structure and continue to do and proposed is extremely well.
For a range of scenarios next year, we're also making real progress with our strategic initiatives to support the 2025 plan, including the capacity expansions and new distribution center and new product introductions.
We mentioned returning record levels of capital to shareholders, particularly through Axa accelerated share repurchases.
Just want to remind you once again please.
Please join our Investor event at <unk> in November you will.
<unk> be disappointed by the experiences that we're going to have.
On display the recently released products and some exciting unreleased products and technologies.
This afternoon I'm, having that Fort Lauderdale show has seems to have opened very well Mercury has got great share there on a.
Premium brands once again seem to be doing well, so I'm very excited to do that.
Thank you.
Goodbye for now.
Yeah.
This concludes today's conference you may disconnect your lines at this time. Thank you for your participation.
Okay.
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