Q4 2022 Brunswick Corp Earnings Call
Good morning, and welcome to Brunswick Corporation's fourth quarter and full year 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 questions you may disconnect at this time.
I'm sorry, if you have any objections you may disconnect at this time.
I would now like to introduce sneaking a 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 Foulkes, Brunswick's, CEO and Brian Gladden Yeah.
Before we begin with our prepared remarks, I would like to remind everyone that during this call. Our comments will include certain forward looking statements about future results.
Please keep in mind that our actual results could differ materially from these expectations for details on 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 that cop.
During our presentation, we will be referring to certain non-GAAP financial information.
Reconciliations of GAAP to non-GAAP financial measures are provided in the appendix to this presentation.
And the reconciliation sections of the unaudited consolidated financial statements accompanying today's results.
Now I'll turn the call over to Dave.
Thanks, Nate and good morning, everyone.
We concluded 2022 by delivering record performance of $6 $8 billion in net sales and almost 1.05 billion of adjusted operating earnings for the full year.
Continuing our exceptional history with <unk>.
<unk> operating performance and cost control and a challenging macroeconomic environment.
Our full year adjusted earnings per share of $10.03 highlights the strength of our businesses and leaders and the robustness of our portfolio and earnings profile.
All of our divisions contributed to this strong performance without both segment exceeding 10% full year adjusted operating margins for the first time in company history.
And the propulsion and parts and accessories segments, delivering exceptional topline and operating earnings growth versus prior year.
Both field inventory levels are recovering, but global units exiting the fourth quarter were more than 5000 units lower because at the same time in 2019, and there is no indication of material wholesale cancellations.
Our boat and engine production levels finished above prior year, despite some continuing supply chain challenges.
As the overall market and sector dislocation continued we executed $90 million of share repurchases in the fourth quarter, bringing our full year share repurchases to $450 million.
Turning to the segment highlights each segment contributed to the robust adjusted operating margins in the fourth quarter.
Compared to the fourth quarter of 2021.
Despite some supply chain shortages earlier in the quarter, our propulsion business delivered exceptional results with 17% top line growth versus fourth quarter 2021.
Enabled by favorable product mix and pricing actions taken earlier in the year.
Mercury has captured significant market share in outboard engines with approximately 300 basis points of retail share gain in the U S and more than 10 percentage points in over 300 horsepower engines. Since December 2019, which has been a key focus area for our investments.
It's continued to perform above expectations with the recently launched feed 10 outboard engines being extremely well received in the marketplace and met with strong demand.
The capacity expansion projects and are funded like Wisconsin campus, primarily for higher horsepower outboard is materially complete and will enable increased production for recently understood International and Repower channels, together with new and existing OEM customers in 2023 and beyond.
Okay.
Our book business delivered outstanding top line and earnings growth in the quarter, reaching 10, 2% full year adjusted operating margin for the first time in company history.
Each product category posted strong topline growth.
Operating earnings expansion for the fourth quarter compared with the same prior year period.
Our bulk business continues to diligently manage global pipeline levels, which remained healthy at 18000 units or 24% below 2019 levels.
Freedom Boat club had strong same store membership sales increases in the quarter. Despite its southwest, Florida operations recovering from the impacts of Hurricane Ian.
All hurricane impacted locations have now reopened.
Freedom continues to grow globally, and now has more than 370 locations in our fleet size of approximately 5000 Boes, all while expanding synergies with Mercury Marine and our boat brands [laughter] Freedom also recently announced the opening of its first location in Australia.
Our parts and accessories businesses delivered solid adjusted operating earnings and operating margin growth in the fourth quarter.
Operating earnings contributions were broad based across all P&A businesses as optimized pricing and the initial benefits of the redesigned ethical group organization.
More than offset the negative impact of currency and the return to more normal seasonality in the quarter.
Sales were impacted by certain headwinds, including currency, leading to slightly lower top line performance.
However, on a full year basis revenue was down less than 1%, excluding the impact of currency and acquisitions versus the record 2021.
Finally, we have now lapped the one year anniversary of the PNA transactions and are very pleased with the integration of the businesses.
Shifting to revenue, we continued to deliver growth across regions on a constant currency basis, excluding acquisitions.
In the fourth quarter, all regions grew sales versus fourth quarter 2021.
Overall U S sales increased 13% and international sales increased 12% versus the prior year quarter.
On a full year basis sales increased 12% compared to 2021 on a constant currency basis, excluding acquisitions led by gains in our propulsion in both segments.
Finally, with increased production capacity and high horsepower outboard engines, we anticipate further share gains by a new customers international markets and Repower channels.
Turning to external factors, we continue to see overall improvement in supply chain stability in delivery, but with some persistent issues continuing to require very active management and impacting productivity inefficiency for some product lines.
Despite these challenges our teams continue to work diligently and creatively to optimize production.
Input cost inflation has moderated and we have essentially we're in sense of historical pricing cadence and some price increases.
High interest rates and become a consideration mainly for buys a value product.
Consumer interest in boating engagement remains strong with related search activity, mostly in line with pre pandemic levels and appropriate for the low season.
Early season boat shows have been encouraging with many shows sold out and attendance above prior year levels.
We're also seeing strong attendance and activity yet it shows outside the U S.
Notably at the very recent Dusseldorf International show the largest show in Europe , where our brands reported solid sales as well as strong lead generation.
Mercury share of outboard engines above a 150 horsepower at the show was close to 60%.
From a dealer standpoint, while our channel partners are aware of the macro factors.
He lives are appropriate at least stocking and order levels remain healthy with no sign of material wholesale cancellations.
Moving now to the 2022 U S retail boat market.
Fourth quarter activity did not materially change full year results with the main powerboat segment down mid teens percent from 'twenty, 'twenty, one and approximately 7% lower than 2019.
[laughter] outboard engine industry data it was more favorable with a U S industry registrations, finishing 2022 down less than a percent versus 2021, 9% ahead of 2019.
[laughter] Mercury performance in the fourth quarter remained strong, especially in high horsepower with 360 points of retail share gain in the fourth quarter and 300, plus horsepower engines versus fall 2020 one.
[laughter] prompts ex boat retail unit performance in the fourth quarter and full year was broadly consistent with the overall market performance with outperformance in recreational fiberglass products premium pontoons, and underperform ups anybody who aluminum, but we continue to focus successfully on margin maintenance and expansion.
And have shifted production to higher margin product lines at the recent expensive some unit share of the value of aluminum product.
As we look to 'twenty to 'twenty three we remain confident in post COVID-19 boating participation rates with more than 10 million bulbs still being registered in the U S. Each year.
And people continuing to have more flexibility in that working arrangements.
Alternative participation models, including Freedom boat club.
Also driving participation by a more diverse consumer demographic.
Although recent history industry retail sales generally show a positive outlook.
Despite softness in 2020, one and 2022 caused by a combination of inventory shortages and macroeconomic factors.
Industry retail boat sales have increased at a low to mid single digit CAG since the end of the great financial crisis.
Unlike in some other industries, although boat sales was somewhat elevated in 2020.
But she constrains prevented a true co, which sales spike and subsequent dislocation between inventory and demand.
As we start 2023 industry sales of approximately 170000 units are similar to 2016 levels.
Whereas with a fairly constant 10 million boats in the U S. Both park and assuming a typical useful life of 30 to 35 years replacement rates would suggest sales potential close to 300000 units.
On the subject of pipelines U S unit inventory remains 28% or almost 5000 units below 2019 levels.
Fiberglass inventory levels remain even lighter with 31% fewer units in dealer hands at the end of 2022 than in 2019.
[laughter] boat inventory at the dealers outside the U S or it's similar weeks on hand levels.
Dealer inventory is very fresh and our brands have done a fantastic job getting out many very exciting new products to our dealers.
The prime 2023 selling season.
As always we are continuing to monitor inventory levels and will adjust production accordingly.
Our initial plan for the year is generally to match wholesale with retail except in premium fiberglass categories, but it is still necessary to rebuild from current low levels.
I'll now turn the call over to Ryan for additional comments on our financial performance.
Thanks, Dave Good morning, everyone.
Other delivered an excellent fourth quarter with record sales operating earnings and EPS for any fourth quarter in our history.
When comparing to prior year fourth quarter net sales were up 10, 6% with adjusted operating margins of 12, 8% up 190 basis points.
Operating earnings on an as adjusted basis increased by 29% and adjusted diluted EPS of $1.99 increased by 38%.
Sales growth resulted from steady demand new product performance and pricing implemented in previous quarters, partially offset by unfavorable changes in foreign currency exchange rates.
All segments contributed to the strong operating earnings and margin growth versus the fourth quarter of 2021 with the net sales growth coupled with prudent cost containment efforts, partially offset by continued elevated inflationary pressures and spending on growth initiatives Aces and new product technology.
Lastly, we delivered free cash flow of $193 million in the fourth quarter, which equates to a free cash flow conversion of 133%.
On a full year basis Brunswick has also delivered record results, including net sales of over $6 8 billion and adjusted diluted EPS of $10.03.
We also increased our adjusted operating margins versus a record 2021.
A testament to our ability to operate efficiently in a challenging external environment.
We successfully executed our capital strategy in 2022, ending the year with over $600 million of cash while funding growth in our businesses and returning capital to shareholders.
We deployed $388 million for capital expenditures on exciting new products and capacity projects across our businesses, which we believe will drive future revenue and earnings growth.
In addition, as Dave mentioned, we took advantage of market and <unk> share value dislocation repurchasing $450 million of our shares representing approximately 6 million shares or 8% of the company.
We also increased our dividend for the 10th consecutive year.
Finally, our investment grade credit rating remains strong, reflecting a healthy balance sheet.
Net leverage is at one six times and there are no material debt maturities until the back half of 2024.
In addition, our strong liquidity and cash flow generation capabilities continue to provide investment and spending flexibility across the enterprise.
Turning to our segments, our propulsion business delivered yet another quarter of outstanding top line earnings and operating margin performance.
Revenue increased 17% versus the fourth quarter of 2021 as higher sales were driven by continued gains in global sales volume favorable product mix and higher prices as compared to prior year.
Operating margins were up 90 basis points and operating earnings up 24%.
Enabled by the increased sales and lower operating expenses slightly offset by higher inflationary costs and investments in new products and capacity expansion.
Note that the previously discussed capacity expansion it sounded like Wisconsin facility, which is adding more than 50% capacity at the 175 horsepower and higher categories is materially complete and will enable increased sales to underserved repower international and consumer markets. While also ensuring our OEM partners that the engine.
Need for the 2023 retail season.
Parts and accessories business leveraged strong operating margin performance to drive earnings growth versus the fourth quarter of 2021, despite sales being down 8% or down 5% on a constant currency basis.
Note that there are no acquisition impacts in the quarter as we've now lapped the anniversary of the 2021 PMA acquisitions.
Aside from the negative impact of currency fourth quarter P&A sales showed the return to more normal seasonality in the marine channel.
While RV OEM customers, primarily in an advocacy group and distribution businesses deferred purchases into later periods to match their revised production schedule.
On the Navajo group side retailer restocking continues to trail point of sale retail performance.
The trends here continue to improve.
Finally, the destruction caused by Hurricane Ian in southwest, Florida did impact our distribution businesses in the area.
For the full year, despite the U S retail boat market being down mid teens percent. Our total P&A business net sales were down less than 1% once you remove the impact of currency and acquisitions.
Or.
Still 21% higher than 2020, and 32% higher than 2019.
All reinforcing the stability of this annuity based business.
Our boat segment had another fantastic quarter, delivering strong top line and earnings growth together with double digit operating margin for the third straight quarter.
As Dave mentioned earlier, the boat business reported full year adjusted operating margins of 10.2%, reaching double digits for the first time in <unk> history.
The boat segment reported a 26% increase in net sales and a 60% increase in adjusted operating earnings in the quarter.
Segment operating earnings and margin growth were enabled by the increased sales volumes together with operational efficiencies and positive mix, partially offset by continued cost inflation and limited discounting.
Freedom Boat club, which has included a business acceleration contributed approximately 5% of the boat segment's revenue during the quarter.
Moving to our 2023 outlook, we entered the year with momentum created by our strong 2022, and we remain extremely focused on executing our strategic plan and leading the marine industry in growth and innovation.
We do however, recognize that uncertainties in the macro economy may impact our consumers in the markets in which we participate.
Our 2023 guidance still remains bias to growth versus 2022 but allows for more variable outcome should economic conditions worsen.
As a result, we anticipate net sales between six eight and $7.2 billion.
Adjusted operating margins of approximately 15%.
Our continued focus on operating expenses with a slight increase as a percentage of sales.
And adjusted diluted EPS in the range of $9 50 to $11.
We also plan to continue our emphasis on generating more cash in 2023, and anticipate free cash flow generation to be in excess of $375 million.
I'll discuss the various factors in a few slides.
Lastly, we're also providing directional guidance regarding the first quarter, where we anticipate flat to slight growth in net sales versus the first quarter of 2022 with EPS between $2 30, and $2 40.
Turning next to our segment outlook, we anticipate that each of our businesses will play a role in our 2023 success.
Our propulsion business looks to leverage that new capacity for high horsepower engines to satisfy demand around the world and grow market share from new and existing OEM customers, while still having the available products to reach the recently underserved market channels.
The result is anticipated top line growth in the mid to high single digit percent.
With operating margins, plus or minus 30 basis points versus 2022.
Our P&A segment to see the top line. It is flat to slightly up with benefits from a steady marine market market share gains and pricing offsetting continued currency headwinds and a slower RV channel for the early part of the year.
Similar to our propulsion outlook, we believe that CNA operating margins looked flattish to 2022 with a bias towards growth.
Lastly, our boat segment comes off a record 2022 and believes its topline will look similar to 2022 with potential upsides in premium boat products and growth and freedom bounced against possible reductions in sales value boat products.
As Dave mentioned earlier, we plan to be very prudent with pipeline inventories and believe we can reach our 2023 goals without adding unnecessary units into the market.
Finally, we also believe we can maintain our double digit segment margin in the current environment.
I will conclude with an update on certain items that will impact our P&L and cash flow for 2023.
We anticipate working capital usage during the first half of the year, but have a keen enterprise wide focus on generating working capital in the back half of the year and continue into second half 2022 trend of moderating inventory levels.
Depreciation and amortization will be higher than 2022, reflecting the increased capital spend in recent years on new product and capacity with acquisition amortization expected to be similar to 2022.
On taxes, and assuming no material changes to the federal tax legislation.
We anticipate a federal effective tax rate of approximately 23% with a slightly lower cash tax rate.
Lastly, consistent with the past several years, we expect to execute a balanced capital strategy in 2023.
Leveraging our strong cash position and liquidity.
With the Mercury capacity project, mainly behind US, we believe our capital expenditures will decrease versus 2022.
Resulting in approximately 350 million of Capex spend for the year, primarily used for new product investments cost reduction and automation products projects at all of our businesses.
Note that we have the ability to significantly reduce this capital spend during the year should economic conditions dictate.
We plan to spend around $150 million on share repurchases, but similar to 2022, we have the ability to aggressively increase this figure should market conditions or a dislocated share price create opportunities to be more aggressive.
I will note that we have already purchased almost $15 million of shares this month.
We have approximately 80 million of long term debt coming due in 'twenty, two 'twenty, three but given our fixed debt profile and low cost of debt, we do not plan to retire additional debt during the year.
Our net interest expense is estimated to be approximately $100 million.
Note that FX will continue to be a headwind despite recent rate moderation.
From a currency exposure perspective favorable euro rate movements between more than offset by unfavorable Canadian and Australian dollar and Japanese yen comparisons.
In addition, our hedging benefits will be lower due to a less favorable effective hedge rate, but which reflects the trailing impact of the U S dollar strength.
We continue to execute our systematic hedging strategy, which effectively reduces year over ear volatility.
I will now turn the call back over to Dave for concluding remarks.
Thanks Ryan.
Before we close out I wanted to share a few more recent updates.
In 2022, we received 95 awards, recognizing exceptional product business and individual performance across our enterprise the highest number of awards we've won in a calendar year.
I'm extremely proud of this recognition, which reflects the extraordinary talent across our organization, our inclusive culture and a commitment to moving our company and industry forward.
We began the new year at the 2023 consumer electronics show in Las Vegas, with a very exciting exhibit and the launch of a major refresh of the Brunswick brand, including a new company tagline next never rests that signifies a long term commitment to technological and business model innovation.
At the show, we officially launched the Mercury Abbott towards 7.5 E Electric outboard engine.
And a new boat brand via abbots, all N V generated huge interest from consumers channel partners and dealers.
As I previewed earlier in the year 2022 early 'twenty three has been extraordinary period for new product introductions across all businesses.
In November Mercury introduced the all New V 10, 350, and 400 horsepower Dorado outboard engines.
<unk> lightest quietest engines in that class running 45% quieter than a leading competitor a cruise.
In addition, the new engines come with optional dual mode 48 volt 12 volt Alternators are first in marine.
Seamlessly pet with Navajo group's new Fathom, two E power system, providing boats as the opportunity to eliminate the onboard generator system.
Demand has been outstanding and we expect to see many at the upcoming Miami boat show.
As I mentioned at the beginning of the year, we began the launch of the Mercury abbots, all electric outboard family with the unveiling of the Mercury avid towards seven five E, which has now begun mass production.
These engines are designed for the same outstanding customer focus features quality and durability is all mercury products and consumer interest is very high.
Also in January we launched fear and all New book brand designed to support electric propulsion and expand access to voting.
The first model the V 13, 13 foot fishing and multipurpose vessel built from durable roto molding polyethylene designed to be powered by Mercury abbots, all electric propulsion systems and conventional Mercury outboards.
In addition to the Fathom C E power system.
<unk> group launched two new fish finders.
But Lawrence H D S live and <unk> pro.
And finally last week, we launched the next generation CRA SPX to 10.
The new Sea Ray design, DNA and the new baseline of EF 19 at the Dusseldorf International boat show.
And the excitement is not over we'll be launching more new products at the upcoming Miami boat show.
Before I close I'd like to remind you about our investor and analyst event on February 16, 2023 at the Miami International Boat show, but we look forward to hosting you just see all the latest products and technologies from across our brands and businesses as well as meet with members of our management team.
Thank you for joining the call that concludes our prepared remarks, we'll now open the line for questions.
And at this time, we'll be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad.
Information tone will indicate your line is in the question queue. You May press star two if he would like to remove your question from Nicky for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star.
One moment, please while we poll for questions.
Our first question comes from the line of Ian Sue with BNP Paribas. Please proceed with your question.
Hi, guys. Thanks for the question My first you talked about modest retail pressure or decline.
In 2023 can you maybe elaborate on what that means that down.
They're just low single digit.
And then within guidance.
A little bit of a wide range is the difference between the top end and the low end.
Better retail like low single digit maybe on the high end and a high single digit decline on the low end or maybe any color on that would be helpful.
Yeah, Hi, Tien, it's Dave Thanks.
Thanks for the question, maybe I'll start with the guidance range, Yeah that was.
Yes, certainly.
All discussion on that I think a couple of things reflected the one is we were coming off several years, where external factors have played an outsized role I think in.
Business overall, it's certainly some expense in our results, although I think we've been extremely resilient.
But the top end of our range, but we're not counting on a kind of market support against the top end of our range.
Retail is flat to even slightly down we can access the top end of that range it would need to be something much more significant.
For us to to get to the lower end that would be external factors involved but Brian can walk you through some of those I think I would note, though that even the lower end of our range is significantly above some of the kind of worst case scenarios that we laid out 18 months or so ago in.
In our Investor presentations. So I think we wanted to be balanced and hopefully we can spend the year walking it up or not I'm not talking too much about the lower end of that range.
In terms of.
What's going on there she Uh huh.
What's been quite difficult with the kind of call the shape of the year, because I think even at a macro level, it's been difficult for economists to call the shape of the year.
I would say.
The early ER is up versus 2019 in retail and a bit down versus 2022 and in retail.
If you'd asked me.
Two months ago.
Take the Saturday she I, absolutely would have taken I think some of the highlights have been boat show attendance.
And really.
Strong consumer interest in.
In our purchasing.
But then we also are facing a consumer that's under pressure. So I would say that we currently believe we will see continued strong performance in premium of fiberglass with some underperformance in.
Aluminum and the underperformance in aluminum as you know could be down mid could be down high but not really show how to call. It right now, but I would just reinforce that we can still access the top end of our guidance, even if the market is flat to slightly down.
Sure.
Okay, and then maybe on propulsion.
Maybe can you break down a little bit more your expectation or volume mix and price within the revenue guidance.
Because with the capacity expansion and you know it's higher horsepower I would think that mix is a benefit.
And then maybe you have some share gain.
But at the same time, maybe not work low organic volume and a little bit lower.
Volume is flat mix a benefit in pricing you all did that kind of how youre thinking of that.
Yes.
Take this one for you you know this is really a high horsepower story.
The demand for high horsepower engine, certainly Mercury's high horsepower engines is extremely strong all over the world and now with the capacity materially behind us.
We have the chance really to go out there and to service our current Oems Conquesting, new widened and range of Repower International commercial markets that frankly, just haven't gotten markup have not gotten.
Unit, so quite a bit so I would tell you of the three you know overall volume if you look across all of our horsepower nodes may not be much greater than this year, but it will be greater in the higher horsepower, which is obviously a mixed up.
On revenue and on margin and then.
There's probably a little bit of price baked in at the back half of the year like Dave said normal price increases that are anticipated.
You know that that means it's generally low kind of low single digits on the mercury side, so lots of mix.
Hi horsepower not a whole lot of price.
And volume is certainly up on high horsepower, but certainly could be.
Flat to slightly down on the small stuff under under 60 horsepower.
Great. That's very helpful. Thank you guys. Good luck.
Our next question comes from the line of James Hardiman with Citi. Please proceed with your question.
Hey, good morning, Thanks for taking my call. So.
I wanted to dig into.
David you you alluded to it a little bit you had given us some potential downside scenario a year ago right for $8 $6 scenarios.
It seems like at the at the low end of your guidance. This year, we're getting pretty darn close to that 30.
<unk>, 30% cut to the industry right versus 2021 I believe right.
You know 161, 70, I think it was sort of the range to get to that eight Buck I guess what has changed it seems like there is some incremental earnings power.
Even at that I don't want to say worst case scenario, but unfortunate case scenario.
Whats ultimately change there to it we can get us to the 950 I understand but the whole goal will be to go towards the higher end of that guide, but I'm, just trying to sort of shape up the downside here as we sit here and.
Your stock is trading at nine times, even at that lower end.
A bad case scenario so to speak.
Yes.
Thank you James for the question, Yeah, I think well maybe a couple of things.
A different.
Although I think we would say that the market is probably over a couple of years 'twenty.
20, plus percent I would say, but probably not 30%.
Maybe in the mid teens this year and something in the.
Kind of mid singles to maybe high singles last year.
I think what we've done that that is a unit basis obviously.
We haven't really talked about the fact that we've had two years of pretty strong pricing.
But the top end of the market.
Particularly the premium end of fiberglass remains very strong so we're benefiting from mix and we've deliberately.
<unk> some of that weakness on the boat side by mixing up in terms of.
Producing fewer of the really they kind of lower end value product than we used to and focusing more on some of the top end.
Another factor is I think as you saw that although the boat market is down the outboard engine market is anything but.
So even though it was essentially flat to last year.
You know, what's happening with our share gains and we anticipate.
Those share gains.
Continuing as we get the capacity online and I know you've been excited about.
The introduction of Avatar.
Expect to make thousands of units of <unk>.
But for this year, and we expect them to be profitable as well so I think.
Outboard engines in which was a real big strength of ours are not down with the market and then what we have seen is.
Pretty robust I know, we were put down in the fourth quarter, which we can talk about but pretty robust.
<unk> participation.
Which.
Led to our P&A business being.
Pretty much flat on a constant currency ex acquisitions basis. So we continue to see that good participation. So I think some components of that downside story.
Hum.
Of occurred to some extent, but I think our response to it and the way that the market has developed in our favor, particularly in high horsepower more premium product.
Has mitigated a lot of that impact and we don't foresee that changing.
Brian I know if you have any other maybe the deal.
The two points I would remind people as our opex control our ability to really watch cost.
And counteract some of the market applications has been proven this year and I think we'll continue to be disciplined throughout the.
Throughout 2003, the other the other item that we kind of talk about every call.
Every new product that comes out is at a stronger margin profile than the one that is replacing.
And the focus on design for manufacture at the right cost continues to really be able to.
Keep a.
A higher floor on propulsion certainly and in P&A you know James if you look at the $9 50 case, if you go down and look at kind of the <unk> that really has to assume the worst of all of our guidance pieces, which we find very unlikely to happen in our environment that we're in.
Seen today.
Certainly held up by propulsion and P&A with the boat business continues to be healthy despite lower value.
Got it and then one more question for me.
You talked about how.
Most cases wholesale is going to match retail this year, except for that premium segment.
Maybe you can help us quantify.
How big that are.
Exception is and ultimately if I think about.
Wholesale versus retail and unit, what sort of a delta we're looking at.
I guess, how how much that add to these numbers right that's sort of that.
Remaining inventory fill if theres a way to think about that from a from an earnings perspective.
Yeah, I don't know if I can connect all the dots that someone asked about help from Ryan I would say significant factor here as we were.
All through last year, essentially ramping up second large Boston whaler.
Facility in Boston Whaler.
Retail and wholesale will continue to be constrained. So we could have sold them.
A lot more Boston whaler is last year, we were better off with with theory. So Boston whaler inventory continues to be very low that facility is now up.
Running and being productive.
So currently we're anticipating that facility running.
Pretty much at capacity.
Its something <unk>.
Materially changes.
I still do not anticipate that at least for Boston whaler that will get fully to equilibrium. This.
This year, we might with sea Ray I don't Brian do you have any I know thats a good way to put it I mean from a unit perspective, James you know that our premium is kind of a third of the overall volume, but the value being the rest, but it flip flops more or less on a dollar side.
So you've got sea Ray whaler Lund and some of our premium pontoons all of those areas. We think we're still going to be relatively strong and pipelines there are low.
So from a wholesale in total could be down a couple of thousand units.
Where premium is up a little bit on wholesale with pipeline staying about the same we just we have no interest in putting more putting outsized inventory in the field, but we do have work to do certainly on whaler and certainly on a bigger sea rays, and we'll we'll be working on that throughout the year.
Got it that's really helpful. Thanks, guys.
Our next question comes from the line of Fred Wightman with Wolfe Research. Please proceed with your question.
Hey, guys I just have one quick clarification, you guys keep referring to the engine capacity project is materially complete was there a delay versus plan or is that just sort of.
In line with the.
The original timing.
No. It's in line with the original timing.
Some parts of the project just were already planned to them to spill into.
This year, it's really a project I think I said at one point there were 150.
Different projects and some of you.
Actually visited the facility and so everything that was going on that are needed to be completed but essentially we have access to all of the volume that we need now we did mentioned in the call that you know when we do the <unk>.
I'm sorry in the deck that.
We not only had to get the facility up to capacity. We also have to get the supply base up to capacity.
If you look at Q4.
We have that now, but if we get a little bit of a slower start with some suppliers. He took a bit more time to get up to full speed then we.
I would have liked we have that behind us now, but that did cost us some revenue in Q4 and propulsion.
Which is to be honest most of the gap between what we anticipated fourth quarter revenue to be in what.
<unk> ended up being but now we're in very good shape, but things are running extremely well across all the product lines.
Supply basis up to speed and producing as we need them to to satisfy volumes this year.
Makes sense and then.
I thought the earlier there was a fear that there would be some headwinds from a tariff exemption explorations impacting twenty-three numbers did that wind up happening is there anything that you guys are sort of baking into guidance.
On a year over year basis.
Hey, Fred I'll take this I mean, we had hoped to get through a call without talking tariffs, but you have to get here we are.
We are taking advantage of certain exclusions for 2023, but they expire kind of mid year ish right now.
On the flip side of that we're taking more components slightly more components from China that are subject to tariffs that we don't have the exclusions from so net net our year over year tariff feedback is about the same it's probably a little bit worse than by a little bit I mean, a couple of million dollars worse, maybe maybe.
Five ish, it's still a 50 million dollar headwind to the overall P&L versus a known tariff world, but the reason we kind of dropped it from the year over year guidance Slide is it's kind of status quo from a total dollar tariff impact. Despite the fact that the pieces are different.
Got it thank you.
Yeah.
Our next question comes from the line of Mike Swartz with Chewy Securities. Please proceed with your question.
Hey, guys.
Just a question on the boat business.
Thank you you've mentioned now for I think the second Court conference call in a row that you're kind of re out are you kind of.
Prioritizing some of the premium and value boat lines.
Understanding that probably has to do with some of the market demand that you're seeing but is there any <unk>.
Our resource allocation to think about as you think about the boat business and maybe model make up longer term and then if you're shifting more towards the premium side of the boat business is the supply chain, where it needs to be obviously those are more heavily contracted miles usually.
Or any potential hiccups a risk to that.
Yes, Hi, Mike.
Yeah, so shifting doesn't necessarily mean kind of a wholesale move from aluminum to fiberglass or something like that it's really shifting to different model lines within those categories.
So as you know we make boats the cost $1500 aluminum small aluminum jumbos.
But we make them in the same facility, but aluminum facilities, what we make $100000 Lund.
Premium fishing aluminum fishing boats, so that kind of.
Emphasis if you like and certainly it does and has involved a resource allocations within facilities.
Actually means.
Producing less of those Commoditized type.
Within the facility and more of the premium product lines with higher margins it isn't a wholesale shift from.
Crestline that's awesome.
Boston whaler or something like that.
What we've really seen in our in.
In the market and the value of aluminum is.
None of the kind.
Major players are gaining share and what's happened is some of the small kind of what's the most.
Scrap the I guess I would say players isn't that really a volume value aluminum segment that would dormant during COVID-19.
<unk> really challenged by supply chain have kind of come back to life.
And taken some share and that really kind of value value and the aluminum market, but just not interested in kind of chasing that much when we can reallocate resources to more premium aluminum product lines, particularly widened.
Two product lines. So there really is a huge difference between what you've seen Sampson unit volumes in the marketplace and where the profit pools are.
And it's more about product line resource allocations versus you know a.
Major shift of emphasis.
And maybe on the supply chain Mike.
Thank you, yes, the supply chain is coming along with us, but I will say that we have made concerted efforts to in source some of those pain points.
Several examples would be furniture whaler pontoon.
Part two and fencing that we brought in house a lot of these.
Not not surprisingly, where we share with our visa and when they're running really hard that it's kind of hard to get volume, but we have.
<unk> taken a lot of our pain point and start doing them ourselves.
Mercury has always been famous for their vertical integration in the boat business has been concentrating on it as well. So we are working with our supply chain to ensure they're up to up to the task, but when they're not or where we see challenges, we're very happy to take it in house.
Okay, great. Thanks for the color there and then maybe just one follow up one on the on the guidance I think you're moving pieces, which suggest that gross margin, maybe flattish to down 50 basis points or something of that nature, maybe walk us through the moving parts the pluses and minuses as we think about gross margin I'm sure currency is a big one but maybe.
Some of the other things, we're not thinking about specifically.
Yes.
Mike and and you know.
At this point in the year I'd say, it's hard to hard to judge where everything is going to land currency certainly is a bad guy in and it's primarily the first half of the year, where the comparisons are challenging but you know.
Gross I would say gross margins have the ability to be flat to slightly up or slightly down versus a pretty good year as well.
We think about inflation and some other things that that continues to be elevated but getting a little better.
And really the mix throughout the portfolio, so theres, both mix within product lines, which we've said.
More premium, but also just the mix of our overall revenue a little bit heavier in propulsion and P&A.
A lighter in boats as we've said so that'll that'll have a help on keeping those gross margins pretty pretty buoyant.
Okay, great. Thank you.
Our next question comes from the line of Ana <unk> with Jefferies. Please proceed with your question.
Hey, good morning, Thanks for taking my question.
Just wanted to touch on the outlook.
Yeah.
The marine Max one water.
Good morning.
Having the downhole between the farthest right.
Yeah.
Yeah.
Yes, Hi, I think the.
Well part of the.
Just trying to understand the shape of the year. This early in the year.
It is extremely difficult so I would not be at all surprised to see a relatively wide range of.
Outlooks.
Certainly there is some.
I would I wouldn't call them mixed signals exactly but different points of reference this time of the year.
We're continuing to see I would say early boat shows more encouraging than we anticipated.
We're obviously more of a global footprint than marine Max's, we saw very strong Dusseldorf boat show for example, somewhat.
We anticipated while we sold.
Hi.
Our revenues for example, the sea Ray brand were up eight.
10% or something like that and certainly up over two years ago. So there might be an element of mix in there, but I think to be honest.
A common set of data points are at the moment I think we.
As I mentioned earlier, one thing that.
That is a bit of.
Delta is Boston whaler as you know remains a significant part of the market.
You could say that Boston whaler volume has probably been holding back that portion of the market a little bit.
So as we.
Free up more volume in there I think it's not going to obviously, we will over index on that but probably the market will be up a bit more too.
Great. Thanks.
On the last quarter call you talked about how improvements in abaco could bring.
Our overall P&L.
I guess, where do we stand for.
<unk> provided forward.
Well I think he thought you began to see it really in the fourth quarter, what we did the first.
That kind of consolidation integration efforts and.
Mid third quarter, and we began to see the margins flow through we had a nice bump in operating margins in Q4, I think despite top line being down a bit.
But there's more to go we have to as we go through a big integration like this when we integrated <unk> essentially.
Kind of doubling the size of that group. So we have to take it in chunks, but yeah. There is considerably more to be done.
Beyond what we've already accomplished and we are hard at work on that right now.
It seems looking backwards it seems not.
Not to be the case, but now because it's only been in the portfolio now for 15 months.
And the deal model assumed cost and revenue synergies growing for the first three or four years to a run rate kind of by starting here five. So we are really only in a kind of the early innings and there is work to do and like Dave said really nice proof point there in the fourth.
And that's also at a time you know Napa co navigate itself is about 10% RV.
And you know we didn't we're obviously being a supplier to the RV industry didn't get a whole lot of.
Sales are as they shut down production here in the first quarter. So.
There's always headwinds and tailwind, but we believe that integration is right on track and you'll see a strong twenty-three from that business.
Hey, Thanks for taking my question.
Okay.
Our next question comes from the line of Eric Wold with B Riley Securities. Please proceed with your question.
Thanks, just a.
Maybe kind of a multipart question on the Mercury expansion.
Can you just update us on kind of the amount of the ultimate capacity expansion.
Like to utilize this year.
How much of that is kind of already spoken for because the visibility of orders.
For the year and then how do we think about a lot of these will be new customers, new OEM customers that are coming over from other competing brands or didn't have access to you before which I assume theyre coming in at.
Higher price points higher margins than someone who's been established touching them for some time, how does that play into it and then.
You know my assumption would be that into following years may become more of an established customer that pricing margin would be kind of more normalized if that is the case, how do you kind of work to offset that.
Yes, thanks very much for the question so I think our.
Fond of lack unit volumes were up 13 or 14%. This Q4 over last.
Q4, and obviously.
In the course of Q4, we were ramping up.
So that doesn't reflect the kind of terminal rate of kind of production increase I guess.
So we are we're gonna be exercising the facility above that rate in Q1 some of that.
We've mentioned earlier the.
In order for us to do the OEM conversions, we needed to be clear to them on what we could supply them when we could supply it.
And we also needed to make sure that we can satisfy.
Our existing Oems and to be honest.
<unk>.
Some of the existing Oems would like more product from us this year than we were able to provide so.
You have to get the existing Oems the product that they need which will require additional volume from us.
And then we will bring on board the new Oems and I would say the model year changeover point, which is typically in June will be the point too.
A particular point of high conversion why Youll see.
Those conversions.
Really materialize as.
As Oems do the model year changeover, we certainly do have a lot of opportunity also obviously right now there are nobody turns for example, and go into dealers.
Going into the aftermarket or repower.
Very few have made its international markets so far.
So you'll begin to see those work their way out through the various channels in the course of the year.
So we anticipate that we will use a substantial portion of that additional.
<unk> and continued to be ramping up through the first half of the year as we get to the the changeover, yes, Paul I'd forgo Eric the capacity project is adding 50% capacity at 150 horsepower and above.
It doesn't mean, we're going to be able to use all of that right away, but that is the that's the number we quoted and that's where it's side thats where it stands.
Got it thank you both.
Our next question comes from the line of Scott Denver with M. P. M Partners. Please proceed with your question.
Good morning, and thanks for taking my questions.
Hey, Scott.
Moving over to P&A, obviously, the RV business, notably with the Oems and supply is quite different than we're seeing in the powerboat market right. Now. So if you were to flush out I guess, the <unk> business with the Rvs.
Is it safe to assume that the P&A business was closer to being flat.
I think it's safe to assume that Oh, I see what you mean, okay. Yeah overall here.
Once you take the.
Currency.
You get a lot closer.
Yeah, I mean adjusting for currency, yes, yes, yes, that's probably right there.
Okay.
Land landed see our distribution business also has kind of high single digit percent go into the RV business. So it's you know it isn't it is an impact, albeit relatively small.
Okay, and then last question on engines I know that you've been constrained from being able to put more of your engine production into the repower market.
How does that shape up for 2023 by mid year do you think you'll be able to take more advantage of that part of the market.
Yeah, We I think we will I mean, we've been generally sure thing that part of the market.
Some periods I don't see any reason why we can't.
Supply.
Demand in that market it might take us a bit of time to make sure that we get through.
Ramping up our existing Oems and ramping in some others, but yeah by the middle of the year I don't see why we shouldn't have the capacity to satisfy that demand fully.
Got it.
Thanks again.
Thank you.
Yeah.
At this time, we would like to turn the call back to Dave for some concluding remarks.
Well. Thank you all for joining us thanks for the great questions I think as you've seen despite the very dynamic external environment, we delivered another very strong year.
Revenue up 17% EPS up over 20% businesses are all operating well I do want to congratulate.
Gratulate a boat group for getting into those double digit margins that we've been promising.
This group for some time.
Despite the kind of muted economic backdrop, there is a lot to be excited about in 2023, the new engine capacity coming online new electric product lines in propulsion and beyond.
60, new products that we put.
Put into the market next year last year coming into the market.
Now and experiencing that first full year and a lot of other things going on.
As we mentioned earlier, we did set an unusually large guidance window not because we think there's a high chance will be at the bottom of guidance.
Because we had several years, where external events have really played an outsized role. So we wanted to.
Make sure we reflected that in the guidance but.
As we talked about early even though.
The low end of our guidance is well above the kind of worst cases that we talked about 12 or 18 months ago.
And none of the guidance scenarios anticipates up retail.
So we can get access to that top end with no real help from the market.
It is difficult to call the shape of this year exactly but I certainly am.
Encouraged by the early season boat shows which have indicated a lot of consumer interest, which is what we need to you know that's the basis of how we get to sales just a reminder.
Please join us at our Investor event at the Miami boat show, which will be very exciting for us there'll be new products introduced and you'll get a chance to look at those new products and technologies and speak with our management team on February 16th.
So I hope to see you all that and thank you very much indeed bye for now.
Yes.
And this concludes today's conference and you may disconnect your lines at this time.
You for your participation.
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