Q2 2023 Brunswick Corp Earnings Call
Good morning, and welcome to Brunswick Corporation's second quarter 2020 beat 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 me, how Clark Senior Vice President Enterprise Finance Brunswick Corporation.
Please proceed.
Good morning, and thank you for joining US with me on the call. This morning are Dave Foulkes, Brunswick's, CEO and Ryan Guillaume <unk> CFO .
Before we begin with our prepared remarks, I would like to remind everyone that during this call. Our comments will include certain forward looking statements about future results.
Please keep in mind that our actual results could differ materially from these expectations.
For details on 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 Com.
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.
I will now turn the call over to Dave.
Thanks, Nick and good morning, everyone.
All businesses executed a strong second quarter benefiting from market share gains well received new products solid operational performance and diligent cost control.
We delivered $1 $7 billion in net sales and adjusted earnings per share of $2.35.
Including the financial impact to the I T security incident, which I'll discuss more in a moment.
Mercury Marine continues to gain market share with the U S outboard retail market share up 140 basis points year to date versus prior year.
Well the new boat market continues to face headwinds that's been relative improvement in recent months.
With preliminary June U S. S. S main powerboat retail turning positive and Brunswick outperforming the market in June and year to date.
As we move through the course season fill.
Inventory remains at an appropriate level in most categories when.
When we closed the second quarter with around 19000 units in a global pipeline.
We are focused on ensuring the pipelines remain healthy exiting 2023 and going into 'twenty 'twenty four.
I'm just thinking the need for our dealers and other channel partners to carry a good representation of our portfolio at their locations, while ensuring that we maintain inventory freshness.
We generated strong free cash flow of $193 million in the second quarter, resulting in 2023 first half free cash flow coming in at $144 million higher than prior year.
In addition, we continue to be aggressive with share repurchases.
Executing $132 million of repurchases year to date.
We are relentlessly execute our strategic priorities, including advancing our aces initiatives investing in new products progressing our operational excellence goals.
If somebody thinks structural cost reduction actions across the enterprise.
On June 13, we announced that we'd been impacted by the security incident, which ultimately resulted in second quarter financial results that were lower than our initial expectations.
The disruption associated with the it security incident was most significant in our propulsion and engine parts and accessories segments.
And because of the proximity to the ended the quarter there was limited opportunity to recover fully within the same period.
Within nine days the company and that's it all primary global manufacturing and distribution facilities were fully operational with no significant residual impacts.
We had the opportunity to recover some lost production and distribution across our businesses, which will partially offset lost days in the second quarter.
Hello about less production days on high horsepower outboard engines will be challenging to recover because of the production schedule was already full for the balance of the year.
We estimate the financial impact to be approximately 80 million to $85 million of revenue in the quarter and 60 million to $70 million for the full year.
I'll turn now to some of the segment highlights the facilitated a solid second quarter.
Prior to the disruption from the it security incident, our high horsepower outboard engine production ramp up is progressing and has since resumed allowing us to increase shipments to retail customers and OEM partners.
Mercury Marine continues to expand outboard propulsion retail market share around the globe Derma.
Demonstrating the strength of our comprehensive propulsion product portfolio.
During the quarter, we launched the Mercury racing 500, Oh board shipped the first modeling abbots, all electric outboard lineup to global customers and announced that we'd begun serial production of the next two models.
Oh engine parts and accessories businesses performed as expected, reflecting anticipated sales and earnings declines versus a record second quarter of 2022.
Although sales were up 12% versus the second quarter of 2019.
Second quarter sales in the U S products portion of the business with near flat to Q2, 2022 reflecting strong sales growth exiting the quarter.
We continue to progress the transition to the new Brownsberg, Indiana distribution Center.
While the sales in the distribution portion of the business went down versus 2022 as dealers and retailers continue to hold lower levels of inventory, although turns have improved into the season.
That's what's seen not a core group posted the lowest second quarter sales versus 2022 that's stocking pressure by some retail channel partners continued.
But with improving trends at many retailers in the latter part of the period.
Our recently launched products, including the Lawrence H D. S Pro fish finder and stem right Halo radar are performing very well in the market.
Additionally, restructuring actions were accelerated generating lower operating expenses versus prior year.
Finally, our bulk business delivered double digit adjusted operating margins for the fifth consecutive quarter.
Despite increased promotions and discounting on select product lines.
June retail continued the strengthening upward trend.
Freedom Boat club continues to experience strong same store membership sales growth on a sequential basis now.
Now has 400 locations and nearly 57000 membership agreements covering 90000 members network wide.
All while generating exceptionally strong synergy sales across our marine portfolio.
Shifting to external factors higher interest rates and prices continue to be a headwind for buyers, particularly of smaller product with both loan raised recently exceeding 9%.
[noise] wildfires have also impacted an already soft the Canadian retail market.
From a dealer perspective sentiment remains cautious and while inventory levels for Brunswick's channel partners are healthy.
Proceeding with some caution and carefully monitoring sales as they plan replenishment.
[laughter] discounting or promotional activity is close to all out in 2019 levels and it's being successful in supporting retail in the hearts of the selling season.
Our internal both just sentiment surveys suggest boating participation remains above prior year.
With Google search trends on terms related to boating also improving in June .
In addition, brunswick's ripple boats and online community has now grown to more than 10000 members.
The positive retail numbers in peak season, the very welcome. However, we do not see the fundamental pressures on consumers driven by elevated interest rates and higher prices easing in the short term so.
So we are taking a very balanced approach to production planning while maintaining flexibility.
Shifting to a global view of revenue overall, we saw a 7% sales decline on a constant currency basis, excluding acquisitions, including the impact of the it security incident.
Year to date in the U S market is showing relative strength versus international markets with sales flat to 2022.
From an industry view U S. S. S. I main powerboat second quarter retail unit sales improved sequentially from the first quarter.
The main powerboat segment was down 6% versus the second quarter of 2022.
The preliminary June U S asset side was 2% above prior year.
[laughter] Brunswick performed better than industry relative to both periods picking up share to strong performance by our premium fiberglass and aluminum brands supported by platinum promotions and marketing of select product lines.
[laughter] outboard engine industry data was down 6% in the second quarter versus prior year.
Mercury continues to outperform the industry with second quarter shed now above 50%.
Reflecting retail share gains of 530 basis points and the 115 above horsepower outboard engine categories.
Yeah.
We continue to manage inventory levels closely through the season.
As we look at end of quarter pipelines, we see unit inventory levels recovered versus recent years, but still below the pre COVID-19 level in 2019, particularly for premium product lines.
As we look at the number of units in the pipeline on our books put dealer basis, we see approximately 75% about dealers with inventory levels less than or equal to 2019.
Moving onto recent new products and innovation.
As I mentioned earlier, we recently launched the Mercury racing 500, which delivers high performance for fast luxury sport boats, that's incredibly light weighting only 720 pounds.
But 500 odd replaces the full 50 enjoys a mercury racing high horsepower a lineup that already includes the $300 and a new 400.
Earlier this year, we lost the award winning 7.5, even greet abbott's all electric outboard.
We've now produced around 2000 units and we have strong orders from around the globe.
We recently announced beginning of serial production for the next two models in the abbots all lineup the 20, even 35 fee.
We expect to begin shipping to customers at the end of the summer.
The launch of the 500 and the production of the new Avatar models reinforce our intention to be the industry leader in both internal combustion and electric propulsion.
Medical group continues to released exciting new products, but also software upgrades facilitated by the flexible Android based software architecture deployed on its newest products and reinforcing the increasing importance of software and content upgrades as new sources of revenue and value creation for our business.
Freedom Boat club continues to expand rapidly recently announcing its 400th location globally.
Okay did in Jupiter, Florida.
We've added an average of around one freedom location two weeks since the acquisition in 2019, including 40 international locations.
We're also continuing to build out the freedom ecosystem.
Including successfully expanding our board check out pre owned boat business, which takes both strong freedom refurbish and resell them into the pre owned market.
I'll now turn the call over to Ryan to provide additional comments on our financial performance and outlook.
Thanks, Dave and good morning, everyone.
As previewed last week project delivered a solid quarter. Despite the impact of the June it security incident.
When compared to prior year second quarter, net sales were down 7% and adjusted EPS of $2.35 decreased 17%.
Net sales benefited from pricing implemented at previous quarters, and new product performance offset by lower production and shipments, resulting from the it security incident, primarily in the propulsion and engine P&A segments.
Softer market conditions and value boat and lower horsepower engine markets.
Adjusted operating earnings and margins were impacted by lower sales and slightly higher input costs versus the second quarter of 2022.
Were partially offset by benefits from prudent cost containment efforts across the organization.
Lastly, we had strong free cash flow generation in the quarter of $193 million, primarily due to stronger working capital generation, resulting in free cash flow conversion of 116% in the quarter.
Year to date results also remained solid despite a slightly softer marine retail market and the impacts of the it security incident.
Sales were down slightly from the record first half 2022 with the resilience at adjusted operating margin and EPS, resulting from prudent operating expense control across the company.
Steady gross margin performance.
In the case of adjusted EPS continued aggressive share repurchase activity.
You'll also note that each measure is greatly improved versus 2019, a testament to our continued successful portfolio management operational excellence and capital strategy execution.
Now, we'll look at each reporting segment, starting with our propulsion business, which delivered resolute sales and earnings despite being the segment most impacted by the security incident in the quarter.
Revenue decreased 4% versus the second quarter of 2022 as benefits from pricing favorable product mix related to continued strong high horsepower outboard engine demand and higher sales. So we empower our customers were offset by the impact of production stoppages and planned reductions in lower horsepower.
Our outboard engine and Stern drive engine sales and production.
Adjusted operating margins in the quarter were down 300 basis points as lower sales higher input costs and the timing related to capitalized inventory variances, which you'll remember it wasn't equal benefit in the first quarter.
Set very aggressive cost control.
Production output up high horsepower engines continues to improve which should enable second half sales growth.
The engine parts and accessories business.
Delivered a steady quarter with sales down 13% versus 'twenty, 'twenty, two but up 12% over the second quarter of 2019.
Sales in our U S products business decreased by eight 5%.
But would've been essentially flat versus the second quarter of 2022 absent the security incident.
Sales in our distribution businesses and international markets remained below prior year.
Adjusted operating earnings and margins decreased due to the same factors together with slight increases in input costs and the carryover of startup costs related to the newly opened Brownsberg distribution center, which collectively offset benefits from cost control measures.
You know that July orders in the products business has continued to trend positive as boat usage remains strong.
Nabokov Group reported a sales decrease of 20% driven by lower orders versus a very strong second quarter of 2022 together with the slow recovery of RV OEM production.
Partially offset by strong new product performance.
Segment operating earnings declined as a result of the lower sales and slightly elevated input costs, partially offset by accelerated cost reduction actions and reorganization efforts.
Note that adjusted operating margins improved sequentially by 40 basis points versus the first quarter.
With second half operating margins anticipated to exceed first half performance.
As we look to the remainder of the year orders for the aftermarket channel, which represents two thirds of NAPCO group sales are showing strength versus the back half of 2020 two as retailer inventories are more normalized versus this time last year and sell through demand continues to be solid.
We believe this tailwind will help offset potential lag in marine OEM and our V orders as wholesale production in these areas are slower as manufacturers and dealers monitor inventory levels late in the season.
Our boat segment had another strong quarter, delivering steady topline and slight earnings growth together with double digit adjusted operating margins for the fifth straight quarter.
$62.5 million of adjusted operating earnings in the second quarter is the highest earnings achieved in any quarter in boat group history.
The boat segment reported a 1% decrease in sales due to the favorable impact of prior year pricing actions and favorable mix towards premium products being offset by lower shipments of value products and higher discount levels, which are still within expectations.
Adjusted operating earnings growth was enabled by the above factors, coupled with share gains and sustained operational productivity gains.
Freedom Boat club, which is included in business acceleration contributed approximately 7% of the boat segment's revenue during the quarter.
Our updated 2000 twenty's outlook matches, our preliminary outlook shared last week.
We are reiterating our full year adjusted EPS guide of approximately $9.50.
With revenue up between $6, seven and $6 $8 billion and adjusted operating margins of approximately 14, 5%.
We continue to see positive free cash flow conversion and working capital trends and still anticipate generating more than $375 million of free cash flow for the year.
Finally, we anticipate a solid third quarter, where our revenue should be flat to slightly below Q3 of 2022.
Adjusted EPS of between two lives and 35 cents and $2.45.
This slide provides additional clarity on the components of our updated EPS guidance.
The midpoint of our prior EPS guidance range of $10.25.
The components to get to our updated guidance of approximately 950 are with each of the following being estimates.
35 cents up lost and non recoverable earnings related to the I T security incident, primarily related to the downtime of high horsepower outboard engine production.
Mist engine P&A sales in the middle of the marine retail season.
65 cents related to channel and market dynamics, where despite the U S retail market being only slightly worse than our initial expectations.
Channel partners across our businesses are being cautious regarding pipeline refill given the uncertain macroeconomic environment and continued pressure on consumers domestically and in many international markets.
That's what we're working toward the end of the prime retail season in northern climates, we anticipate slower channel fill in the back half of 2023 in the face of these pressures and an uncertain 'twenty 'twenty four.
Specific examples may include both dealers, taking fewer value boats at the end of the season.
Boat Oems being satisfied with their ability to get 150 horsepower under engine product and having sufficient supply to satisfy late season both borders.
And the marine dealers and retailers restocking parts and accessories at a more reserved pace.
And lastly.
A 25 cent benefit from strong opex control, including acceleration of planned an advocacy group integration and restructuring activities.
For new products, and a lower share count, resulting from aggressive repurchases.
Yeah.
Note that in an adjusted EPS of $9.50, but still be 15% higher than any result in Brunswick history aside from 'twenty to 'twenty two.
Lastly, we have a small handful of full year assumptions that we've updated first given our strong cash performance and continued Brunswick share price dislocation.
We are increasing our repurchase target to exceed $250 million of repurchases for the full year.
Accordingly, our average diluted shares outstanding should be slightly lower for the year at 70, and a half a million shares.
We're also seeing a slightly better foreign currency environment as it relates to our global businesses and now anticipate a full year headwind of approximately $30 million.
Please see the appendices to this presentation for additional information on other P&L and balance sheet assumptions for the year, which have not materially changed.
I will now pass the call back over to Dave for concluding remarks.
Thanks Ryan.
Before we close out I want to share an update on some recent awards and recognition for our company brands products and people.
We recently issued our sustainability report and what they liked it to be named by USA today to the inaugural list of Americas climate leaders with 2023.
We were among the 400 companies that made the final list out of the 2000 and considered.
Brunswick was also named to the U S News and World Report's list of best companies to work for the <unk> 2023 'twenty four.
We finished in the top 10 of all companies in the categories of the best companies to work life balance and quality PE.
Mercury recently won four if design awards for its new products, including two awards for the Abbott saw a 7.5 E.
And one each for all V 10, it would be 12 outboard engines.
Design Awards are one of the most prestigious International design awards crossing all business sectors.
In May Brunswick received a record 11 20 twenty-three top product award from boating industry magazine.
Recognizing innovative industry, leading new products for Mercury Marine Brunswick boat group and medical group.
And for Brunswick female leaders when named by boating industry magazine to its 20 twenty-three list of women, making ways, marking the second consecutive year.
Four of our understanding women leaders are featured on the list.
Yeah.
Before I close I'd like to remind you about our investor and analyst day event on September 18th 2023 at the New York Stock Exchange.
Which will be followed by an opportunity to experience exciting new products and technologies from across our businesses on the water.
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.
Thank you.
We'll now be conducting a question and answer session.
If you would like to ask a question. Please press star one on your telephone keypad.
A confirmation tone will indicate your line is in the question queue. You May press star two if he would like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the snarky.
To allow for as many questions as possible. Please limit yourself to one question and one follow up.
One moment, please while we poll for questions.
Thank you.
First question comes from James Hardiman with Citi. Please proceed with your question.
Hi, Good morning, Thanks for taking my call, obviously with what it sounds like you're trying to take us down the path of and I think a lot of people are trying to do the math of.
How much of the revised guidance is the IC incident, and how much is sort of what's going on in the channel and you've got some good flight deck that that help us with that I guess, maybe if we think about the outlook on a segment by segment basis right. You guys have got the slide where we sort of go through what.
Youre, assuming for sales and operating margins for each of those segments, you got them looks to be down versus the previous guide I guess, maybe walk us through what the I T and what's not in there.
I feel like I can comfortably say that the propulsion piece on one end of the spectrum as he was almost all I T. Whereas the boat piece on the other end of the spectrum. It seems like it's more more demanding and market dynamics.
Dynamics, but maybe walk us through how to think about those various items.
Thanks, James Thanks for the question, Yeah, I think the.
As you mentioned certainly mercury was impacted by the.
I T incident, most then.
The issue there is as we mentioned is our recovery our ability to recover a high horsepower.
Thank you I think there was some kind of questions earlier in the year about whether mercury continued to gain market share, but you saw when you even on a rolling three basis, where.
The Sun.
Market share now so demand, particularly for high horsepower remains.
It remains high so our ability to recover that maybe limited.
Obviously, we'll be doing what we can we're not counting on it.
Broadly on P&A, we we continue to see I think more modest spending we didn't really talk about this much on a regional basis, but I would say, it's probably overall better in the U S and slightly weaker in some of the international markets.
And I have a call in particular, though although we said that medical was not.
Not one of the most impacted areas.
And by the security incident, we noted above $15 million.
Revenue impact on other segments. The majority of that was not a cool.
So now the co was about.
12, 13 million of both our revenue and associated earnings in the quarter now.
Now the Coke continues also to be impacted by the slow recovery of Bobby that's probably about another $15 million of topline that for now the coal.
Our boat group.
Really about inventory restocking patents as you mentioned earlier.
Going to be extremely disciplined we have been extremely disciplined.
I think the first half of the boat group has been extraordinarily strong you know margins have held up really well.
But if you look at Q3 last few though for both group. It was pretty strong you know margins held up reasonably well Q3 is generally a weaker quarter for <unk>.
Boats overall because of shutdowns, but we will be reducing production in Q3 to try and make sure that we don't build inventory as we go into the back half. So that boat group is certainly response to normalization of inventory levels.
Got it and then just as a follow up maybe to that last point and what's happening in the boat group I mean, it's interesting finding is interesting because it feels like we thought we've seen better industry numbers that are in place and we've seen it sometimes but maybe tease out how much of it.
The boat group a guide down is actual demand right I mean, it seems like maybe the industry is now a little bit worse than you thought.
First is how you think about a weeks on hand to finish the year I guess I should read into this that you think the channel is gonna be leaner than you initially thought.
Or maybe there are some some of this that we're not seeing you know maybe you know other brands are are higher and so dealers are scaling back.
On everybody. Despite the fact that you guys seem to be in an okay inventory position.
Yeah. It's a good question and I understand how Oh, how those are slightly contrarian kind of indicators I think the this is kind of not just about the year 2023, and 224, it's a bit about the shape of the year I'm kind of a 2023 and 'twenty 'twenty four.
Hum.
The overall year to date retail is trending a bit more towards where we thought it would be earlier in the year and what we indicated it would be but kind of at the lower end of that I would say.
That said then I think some other people thought the market might be.
But that's because of high.
Interest rates.
And because of dealer inventory levels and carrying costs I think what we're expecting is that there is not a high incentive to carry a lot of inventory through the back half of the year.
Thank you customers probably in the towards the end of the season are going to be less willing to buy a boat.
The interest.
Fees.
Through several months in the northern market, where they might not be using the boat.
If they believe that that boat availability is going to be better in the early part of 'twenty 'twenty four.
In terms of inventory levels I think there are quite a number of things for us to think about one is the unit level on an aggregate basis. Another is the unit level by dealer, what we tried to show in that kind of.
Hits the ground was a D.
He was a knock over inventory to tall by historical standards at 575% are below.
Below are at 2019 levels, and we do need some too.
Keep a representation of a good representation of our portfolio, but I think they are feeling the higher dollar value of the inventory that's certainly a consideration for them.
They are cautious on the customer I think so I think we're going to hit a reasonable spot where we get good portfolio representation.
But don't have dealers carrying what they believe are excess amounts of inventory in terms of the weeks on hand, that's probably going to be in the U S 35 to 40, maybe 35 plus.
Which should be roughly at the historical level.
On a kind of weeks on hand basis, but lower on a unit basis than kind of pre COVID-19. So.
I'm not sure if I exactly answered the question, but those are some of the considerations as we think about the back half of the year. We're very pleased with the performance of the boat group I think the the <unk>.
A new models the cost control expense control restructuring that we've done in the boat group is really paying dividends, but we just want to set ourselves up for a successful 'twenty 'twenty four and.
Dave The one thing I'd add is we are outperforming the market as a whole and taking share.
And outboard.
Fiberglass outboard pontoon add fish, yeah. So in terms of James' question on vis vis other manufacturers, we feel like we're more than holding our own.
Yeah that makes a ton of sense and maybe just to clarify I apologize I'm going.
Sneak in one more here, but just to clarify the point on carrying costs and end consumers, maybe being hesitant in the off season that kind of sounds like a cautious or a bearish outlook.
Outlook as we think about retail and into the fourth quarter is that the way I should read that.
I wouldn't say, it's particularly bearish I'll be honest with you James because by the time, we get to the fourth quarter. We're looking at 10% of total retail we're already at 70% of retail for the season. So I think these are relatively small number.
Issues from the consumer perspective, obviously consumer drug retail.
More of a consideration from a wholesale perspective, with I think dealers being cautious.
Got it that makes sense thanks, guys.
Thank you. Our next question comes from Mike Swartz with tourists Securities. Please proceed with your question.
Hey, good morning, everyone, maybe just a broader question on on affordability and how you think about that particularly on the boat side of the business going forward. Obviously, there's a lot of concerns near term with interest rates and affordability, but in terms of your pricing strategy for model year <unk>.
24, and I guess longer term.
Do you think about turning that are moving that more in favor of the consumer I guess, if you do it all.
Yeah.
Yes, we had pretty modest price increases in places like for like in the 3% to 4% range was typical across but that doesn't close represent transaction prices transaction prices are impacted by it.
Discounts and promotional activity.
And obviously, we've been upping that.
<unk> level. So we have a lot of tools to try and.
Presents an attractive overall proposition to the consumer and I think you've seen the impact of that.
We we've been kind of trying different mixes of those things and I think we've settled on what works pretty well currently.
You saw the rebound, particularly in aluminum fish, which was down significantly earlier in the year and rebounded I think based on kind of raw demand, but also on the fact that we were offering I think attractive proposition to <unk>.
Consumers. So I think we're back to kind of good news is back to once a year and back to school.
Very normal levels of price increase, especially when you look at overall inflation.
I think the we do have a real advantage with the breadth of our portfolio. We have a lot of entry points for any consumer into the marketplace.
So I'm happy with the brands that we have that represent the different segments and kind of geographic orientations. If you look at how the market is down this year.
Boats above 30 feet, so really not that much tal.
<unk> boats and kind of 16 to 24 feet the bulk of the.
Bulk of the.
Our reductions and so and that's why we've been targeting a lot of our promotions and discounts. This is really not about a kind of a uniform.
Approach, it's about targets and the approach to the second one I think based on recent retail we seem to have found a good balance.
Okay, and then just a follow up.
Looking at the numbers correctly I would assume that.
Production in the second quarter was down year over year, just given the pricing benefit you have running through the line there, but but segment margins were up I think.
40 basis points or so I guess, we don't see that kind of.
That kind of dislocation when volume is down margins are up but maybe help us understand why that was was that just positive price.
That pricing or is there something else.
To that end up in the quarter.
I think Brian might be able to be more specific here, but I think that's certainly the benefits of historical pricing that occurred last year.
Flowing through to the sheer then we do have.
Pretty good mix I think towards.
Some of our premium product, that's probably helping I don't know if there's anything else.
The main two major components.
Great. Thank you.
Thank you. Our next question comes from Joe also Bello with Raymond James. Please proceed with your question.
Hey, guys good morning.
Question quick housekeeping items, you mentioned earlier that our.
The industry is trying to go a bit worse than you thought I think your your your prior outlook for the U S industry in particular was down with units down mid to high single So just to be clear it sounds like you're thinking industry down high singles for this year.
The U S industry, Yeah, I think that's you know high singles, maybe maybe low double maybe 10, something like that I'd say, that's probably where we are yeah.
Okay.
You have inventory yeah cause of inventory I think Rob you mentioned that you expect us to get back to the 35 week plus that that's pretty close to where we were pre COVID-19. Despite the fact that a lot of dealers you know want to hold less so is that is that overly optimistic or overly aggressive.
Well I think we.
So overall, we have more dealers for one thing obviously, we continued to expand our dealer.
Dealer base, but in terms of on hand I think.
You get lower in terms of absolute unit sales.
There was some other kind of floors that come into place and that really around a deal is really holding a representation good representation of our portfolio.
And that's what we tried to indicate on.
With that the histogram that I referred to earlier, we do need dealers to hold.
You know.
A good representation of our portfolio, so even though our weeks on hand.
It could be in the 35 plus area units will be down a bit.
This is pre COVID-19 levels based on.
You know overall our market at the moment.
Okay, and why do you think we get there.
I'm, sorry, Joe would get to 35 weeks.
So that's the yearend number.
Okay. Thank you guys.
Thank you. Our next question comes from Craig Kennison with Baird. Please proceed with your question.
Hey, good morning, Thanks for taking my question I had some questions on the boat side with respect to the channel. My question is on P&A that business has been facing a destocking cycle for some time now how far along in that cycle are we in and might we get to the point where dealers are kind of replenished.
Saying that dealers, but your retail partners are replenishing.
One to one level.
It might depend a bit on the parts of the business to be honest, Craig, but I think what we are clearly seeing nabk co.
Aftermarket I'm retail stabilizing and even possibly are increasing.
But one of the one of the.
Reasons is as we go into the season, where we have black Friday and the holiday season of dealers will begin to stock up again. So that's a typical pattern. So I would say for NAPCO that destocking has stabilized if anything I would say, we're gonna answer a bit more.
Restocking as we go forward what we have seen is they really strong response to new product. So if we launch new products as we did with the Lawrence H D. S. Pro that's it you know ahead of the competition significantly we see no hesitation by dealers too.
Hold that inventory.
If you look at NAV or co overall, we the two things are essential really for us to do is not a cold one was to get a lot of fresh products products in the pipeline to support our revenues and our accelerated this restocking in.
Beginning to do that I think quite nicely. The other was to get our operating margins stabilized and I think we're doing that nicely too.
The.
Engine, P&A and distribution side, I think we're coming into some easier comps in the.
Back half of the year, So I think you'll you'll see kind of load.
Fall lower reductions there in the back half I don't know, Brian if you have any comments yeah. The only other item would be the brownsberg transition, which was a pretty big a big task that we undertook in the first half of year, just primarily complete and and running at more full speed. So that that is probably hampered us a little bit in the first half hour than we anticipated.
But should be good moving forward.
Got it thank you.
Thank you.
Our next question is from Matt.
Boss with J P. Morgan. Please proceed with your question.
Great. Thanks.
So first on your revised full year operating margin guidance could you just help break down the factors driving <unk> margins to contract more than 100 basis points and then separately just the confidence in <unk> as implied margin expansion and as we look ahead, just how best to think about maybe early puts and takes to consider.
On 2020 for operating margins, just given your level of visibility today.
Hey, Matt I'll start on the on Q3 Q3 is off of a really strong comp last year.
Really from from all of our businesses, maybe maybe aside from the advocacy group, which actually has a bit of a of an easier comp.
Goodbye segment propulsion, we anticipate to have a stronger high horsepower manufacturing, which obviously comes at.
A good margin structure, so that that would be the biggest driver there.
He just said engine P&A is coming off of a really challenging first half comps easier.
The easier in the second half so that gives us some.
Some of them are operating margin kind of stability.
The boat group is as always our third quarter is a bit challenged as Dave mentioned with the model here switchover and also shut downs.
And most of our facilities that just have fewer production days.
That also kind of gets better in the fourth quarter. So when you get to a to a number that's slightly below last year, which again was a was kind of a banner quarter and that leads into the fourth quarter, where I think the comps get a little bit easier from from prior year propulsion high horsepower production continues to be strong.
You have.
A little bit more restocking at Navajo group, an engine P&A and the boat group continuing to operate well the other item I would mention is that we don't really talk specific brands very often but.
Boston Whaler continues to have a really nice run this year I remember last year, we were opening up and really getting underway a brand new facility a second facility for the larger product that is now behind us and we're starting to see the benefits there. So despite lower production in terms of units.
Production at whaler and some of the premium continues to be strong and that gives you margin benefits both in Q3 and Q4.
That's helpful.
Thank you. Our next question is from.
Ann.
With BNP Paribas.
Proceed with your question.
Hi, guys. Thanks for the question maybe first can you just share how many units you shipped in the quarter I think you've met sounded like it was down but just if you have the number.
Yeah, just just below 10090 97 ish.
Okay got it and then the minus 6% retail.
It sounded like you were better than that.
That internally, but is it the magnitude like <unk>.
Well I think first quarter, you were downtown versus industry doubt twenties.
Is the spread still the same or how do we think about.
The outperformance in retail.
Yeah, I would say we would if we were we were quite a bit better than I would say then then the market and in the quarter ending in June so.
So I think we had strong performance across a number of.
Our brands I think a lot of new product supported by some I think very.
Preet and targeted promotion so yeah, we had a good Q2 and a good June .
Thank you. Our next question comes from Scott Feinberg with Ross and Kim. Please proceed with your question.
Good morning, Thanks for taking my questions as well.
It's Scott.
Can you talk about I guess engine parts.
And accessories, you said that if you were to.
Back out the impact from the security breach that you would've been flat.
Can you maybe talk about RV versus boat.
And what the marine side would have looked like if you didn't have to contend with the RV.
Yeah, I'll take that to the U S products piece is primarily marine almost all marine.
So if you look at.
Our comment there that was really Scott Foley marine.
Number because that is kind of captive engine parts and accessories, if he would wear.
Where our V comes into play, it's really distribution and the engine P&A segment as well as an avocado.
So our products being flat in the U S absent the I T is really just marine.
Okay got you and then on the Repower side, maybe talk about what Youre seeing there your expectations. If we go into a tighter boat market.
Do you expect or are you starting to see people deciding that they want to repower what they have.
With your products instead of buying something there.
Okay.
I mean.
There may be some of that I think the bigger factor is just availability of high horsepower product for Repower.
Which is something that we've not been able to supply more unable to supply.
Really proud to the capacity increases that we introduced at the end of last year. So.
I think the Repower is being improvements being driven more by the supply side than the demand side. There may be some demand creation as you mentioned because of the people repowering versus buying new but I'm not sure. If we would be able to kind of take a flight that I would say, it's almost certainly driven by supply.
Availability.
Gotcha.
It's all I have thank you.
Thanks Scott.
Thank you. Our next question comes from Fred.
Right Man with Wolfe Research. Please proceed with your question.
Hey, guys I just wanted to come back to the boat margin performance.
Having 10% operating margin to something that you guys have really hung our hat on for a while obviously the guide for this year calls for that.
To be a little bit lower and I'm, just wondering in sort of the out years. If you still think 10% is sort of the right margin profile of that business or if the floor is maybe a little bit lower than you had anticipated.
No I think the.
In a more normalized market condition above 10% is very achievable and certainly our goal as we go out strategically we we're planning for margins.
It can be above 10%.
It's obviously, a very dynamic situation at the moment as we.
Move from supply constrained to demand constrained if you look at us matching.
Production to anticipated.
Retail I always say, we're gonna have to Underproduce retail at some point. So I think this is a short term dynamic that will return to a very constructive trend longer term.
And if you look at the chart that you provided talking about the dealer breakdown in terms of inventories relative to 2019 is there any commonality among those 25% of dealers where inventories are above 2019 levels do they skew towards product category are they concentrated in one geography anything that sort of stands out.
Yeah.
I don't think so I think it's more.
Most statistical Ben.
Category based I don't know if anybody else that's how that's right at it you know.
Just the law of numbers, there I would say again premium.
Premium fiberglass inventories continue to be extremely low.
In the field and so most of that you would you would see as value based product.
But again, there's no concentration of brand or geography in there.
Fair enough. Thanks, a lot.
Yeah.
Thank you.
Thank you.
Next question comes from Tristan.
Thompson Martin with BMO capital markets. Please proceed with your question.
Morning.
Two questions tied to 'twenty four are effectively trying to look out to 'twenty four.
The owners are very cautious about carrying excess inventory.
Through the through the winter how do you think they approached 24 ordering and then also there's been a lot of moving pieces. This year with the boat kind of channel refill in the PNA Destocking.
Could you maybe quantify those just to give us a little bit of better sense of what a normalized run rate is.
Yeah. So on the first question. So we we go through a pretty unstructured process.
Several times a year without dealers to align on restocking.
Processes going exactly to plan at the moment there are no canceled.
Major canceled orders or anything like that would just.
I'm kind of working through a normal process of aligning inventory levels. We don't I think the you know one of the considerations for us is.
We don't want dealers to have inventory that is not fresh.
We want them, we want a tough products is that going to be able to sell as they go into the season. So it is in all of our interests.
To balance them carrying.
A good representation of our product portfolio.
With us all making sure that they have fresh product that we don't get into the RV situation.
Right now while we.
You know we have deal is loaded up with with a two year old product.
So the process is proceeding exactly as it normally does but every year.
Lining on our inventory.
Levels as we go into the off season.
It's just a very normal process, we've all been through this before this is not the first time.
I don't want this.
Question, Yeah, Tristan I mean, if you wanted to Dimensionalize I mean.
Our P&A business is still on a kind of a year to year CAGR. Since 2019 are still up 10 plus percent I think it's closer to 12 actually so I mean, if you want to look at a normalized situation.
You know that is some pretty strong growth there I would tell you Didnt advocate group and a normalized situation, probably outpaces engine, PMA, which is a bit more annuity and more constant.
So you could kind of go back and look at the trend lines. There and then the vote is really just what we've been talking about a wholesale versus retail a restocking story when you.
If you are retailing 30000.
You know ideally once pipelines are.
Phil do you want to wholesale those 30000, so that wholesale and retail match each other that's probably the the land we're living and starting next year and so that you know.
We're probably at a spot where especially in value product well one in one out retail wholesale we're still catch up to do and probably a bias on growth towards the premium products. So dollars will look better than units.
Hi.
Yeah.
Thank you. Our next question comes from Noah <unk> with <unk>.
Key Bank capital markets. Please proceed with your question.
Hi, Thanks for taking my question I'm, just just a quick one from me in terms of high horsepower backlog for new customers.
How much is left in the back half there and how much of the remaining I guess propulsion guide is satisfying existing dealers and Oems.
Yeah, there's quite a bit of backlog in high horsepower, though so we are still are running flat out and.
Mercury on our high horse power obviously.
In terms of satisfying existing Oems and dealers are continues to be a priority, but we're gradually transitioning the cusp.
Customers as well and we've seen our retail market share continued to rise as we begin to do that.
So yeah, we have a good backlog still and continues to introduce new product.
Stimulate things like the 500 bar is a.
New product.
That will also stimulate additional demand so yeah. The backlogs are strong.
Thank you.
Thank you.
I'd like to turn the call back over to you for some concluding remarks.
Thank you. Thank you all for joining us. Thank you for your questions as you've seen despite some unique challenges in the quarter. We delivered another very solid quarter. We have very strong brands. We've continued to invest in products and technology and capacity, particularly in things like high horsepower outboard in premium.
And those are obviously strong parts of the market right now.
We're also continuing with our restructuring and cost control efforts, you've seen that particularly in a novel co group, but of course, it's occurring across the enterprise.
To prepare us for some of the uncertainties going forward.
It is notable we didn't really talk about it but freedom boat club hitting 400 clubs is very noticeable, but we see it as a marker on that journey.
A much higher numbers than that so that's very exciting.
Continues to be a market, where it's difficult to exactly to predict but we seem to be.
Getting some relative stability and I think that hopefully allows investors to see a bit through the short term and more to some of the really constructive longer term trends that we see in some of the circular.
Benefits that we have in our business, which we will talk about something we're very excited to have you join us at our Investor Day in September in New York, We will provide an update on our strategy talk about some of those secular long term growth drivers and are also have an opportunity just to get you out on the water and some of the exciting new <unk>.
Products. So we look forward very much to you joining us that.
Thank you very much bye now.
This concludes today's teleconference. You may disconnect your lines at this time.
You for your participation.
Okay.
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