Q2 2024 Brunswick Corp Earnings Call
Good morning, and welcome to Brunswick Corporation second quarter, 'twenty 'twenty four 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 Dr. Clark Senior Vice President Enterprise Finance Brunswick Corporation.
Please go ahead.
Good morning, and thank you for joining US with me on the call. This morning are Dave Foulkes, Brunswick's, CEO and Brian Gladden C F O b.
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 prepared 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, Nate and good morning, everyone.
With high interest rates, continuing to pressure consumer budgets and suppress discretionary spending.
The introduction of new model year products at the beginning of the important month of June did not capitalize bulk purchases as we had anticipated.
And our second quarter results were slightly below expectations.
Without strong peak season momentum continues slower retail sales combined with high levels of discounting and carrying costs increased.
Increased pressure on dealer channel partner profit margins.
Bolting and ongoing conservative wholesale ordering patterns, even for new model year products.
And Tim this is causing Oems to maintain lower bulk production rates through the main selling season with impacts to propulsion and medical group OEM orders.
Slower new boat retail sales in the peak sales months, we now expect full year unit retail sales to be down approximately 10% versus our original forecast of flat.
As a result of heightened demand stimulation efforts focused on clearing more H field inventory our.
Our remaining field inventory is very fresh.
Approximately 85% of units being current.
And I'll focus continues on leveraging our new products and adjusting production levels to maintain or gain share in key categories, while diligently managing field inventory levels to end the year with weeks on hand at appropriate levels and units below prior year.
Okay.
Despite sales and earnings below guidance, the resiliency of our portfolio is being demonstrated by our recurring revenue businesses and channels, including our engine P&A business propulsion repo business Freedom boat club and medical groups after market sales contributing more than 50% about Q2 adjusted op rate.
<unk> earnings.
In addition, our businesses delivered strong cash flow.
Enabling 170 million to be deployed for share repurchases year to date further solidifying our focus on returning value to shareholders.
Okay.
Yeah.
Turning to some highlights from our segments in the quarter.
Despite our propulsion business delivering lowest sales and operating earnings for the second quarter of 2023 year to date, we continue to gain share in outboard engines with more than 48% overall share of the U S outboard market.
In addition, propulsion controls rigging, a propeller product categories had a strong quarter.
With operating margins ahead of the same period in 2023.
Our flight E slow business also had its strongest ever sales month in June.
With boating participation continuing to be very solid in all major global markets.
And you're in Boston accessories business had a strong quarter.
Sales and operating earnings up.
Quarter of 2023 and.
And we completed the full translation of engine P&A distribution, so a new state of the facility in Bronxville, Indiana.
As anticipated medical group has the lowest sales and operating earnings.
Second quarter of 2023.
To reduce marine OEM order rates and persistently slow all reorders.
It continues to show stability with sequential improvement in aftermarket sales and overall sales and earnings consistent with first quarter results.
Finally, our boat business had a solid performance given market conditions, we will sales and operating earnings below the prior year quarter consistent with lower planned production levels.
Freedom boat club continues to deliver steady membership sales growth.
Two more flagship locations in Denmark, and the U K Andrew.
And recording an impressive 200000 member trips in the quarter.
Expanding on the external environments with the majority of the retail selling season behind us. It is evident that the 2020 for U S. Marine retail market is underperforming versus our initial expectations due to the continuing high interest rate environment and while it is now.
A higher probability of interest rate relief beginning in September this will be after the main selling season.
We have a minor impact on 'twenty 'twenty four.
It'd be more of a potential tailwind for 2025.
Dealer sentiment is sequentially improving however, the slower pacing of wholesale orders continues as the weaker retail environment drives at this life more conservative inventory levels.
Discounting and promotion levels remained elevated, particularly on prime model year products stimulate retail movement.
Our investments in digital platforms continues to drive benefits across all brands.
40% of boats of Freedom boat club membership sales in Q2 being digitally assisted.
Oems and channel partners continued to moderate production levels to adjust to the environment and in the absence of external stimulus. We do not now see this pattern changing significantly through the remainder of the season.
Yeah.
Despite these challenging conditions, we continue to see strong boating participation.
Noting our resilient recurring revenue businesses.
We continue to invest in our launched many exciting new products and technologies across all our businesses and product lines with the intent to position us for market share gains and to ensure we have the freshest portfolio when the market returns to growth.
Finally, previously proposed North Atlantic right whale vessel speed restriction rule was delayed to November 2024 on the administration's most current regulatory agenda.
Yeah.
Moving now to U S. Retail performance, we saw a weaker Q2 U S retail market than anticipated with the U S industry, New boat unit sales in the quarter declining significantly versus the second quarter of 2023, driven particularly by a week of June.
U S outboard engine industry retail units declined 6% in the second quarter versus prior year.
As mentioned Mercury Marine U S. Overall year to date <unk> market share is holding in around 48%.
Up slightly from 2023.
And our share of 350 horsepower and above engines exceed 70%.
As customer Oems modulate production, which in some cases requires extended manufacturing shutdown periods, we expect market share data across engine a boat brands may be more noisy than normal for the remainder of the year, Although we anticipate gaining additional share in some areas.
During the quarter, we continued to diligently monitor pipeline levels and we ended the quarter with 33 weeks on hand, and 11 and a half thousand units in the U S pipeline.
The above prior year.
In order to manage year end pipelines on a full year basis. We currently plan to wholesale around 1500 fewer units than internal retail unit sales, which represents approximately a 7% reduction in ending inventory versus prior year.
Before I turn it over to Ryan I wanted to quickly walk through the components of our updated adjusted EPS guidance of between $5 $5 50 per share.
As you can see just about all of the anticipated decline from our view in April it's related to the softer market conditions that have persisted through the main retail selling season.
And the resulting channel dynamics, we believe we will experience for the remainder of 2024.
The most significant change since April is the combined impact of the weaker market and resulting lower wholesale sales and an environment, where we anticipate pipeline inventories to be flat to down across all our businesses.
We plan to wholesale several thousand or fewer boats this year than originally planned.
And despite continuing to take market share Mercury will correspondingly ship fewer and just the OEM partners, who are also lowered production to be consistent with demand.
The next two factors are directly related to the slower market conditions.
First all of our businesses are experiencing lower absorption and slightly higher manufacturing costs due to the lower production levels.
Second we continue to use promotions and discounting to drive retail sales and to keep our inventory as fresh as possible.
Offsetting these factors is our combined focus on driving down controllable operating expenses.
We anticipate ending the year with Opex down almost 10% from initially planned levels.
Still protecting spending on key growth initiatives and projects to advance our strategic objectives.
Despite this year and not unfolding as we'd hoped and anticipated we continue to make prudent decisions and expect to finish 2024, Ms strong balanced position.
Pairing to fully capture the upside when the market returns to growth.
Yeah.
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.
<unk> second quarter results were slightly below expectations, but remained resilient, despite a challenging macro economic environment and much softer U S retail marine market than anticipated.
Versus the second quarter of 2023 net sales in the quarter were down 15% with adjusted operating margins of 12, 5%, resulting in an adjusted EPS of $1 87.
Gross margins continued to remain resilient adjusted operating expenses were down $32 million versus Q2 of 2023 and.
And free cash flow performed better than anticipated with free cash flow conversion of approximately 140%.
Second quarter sales were below prior year as the impact of continued lower wholesale ordering by dealers and Oems coupled with higher discounts in certain business segments was only partially offset by annual price increases and benefits from well received new products.
Adjusted operating earnings were down versus prior year as a result of the impact of lower net sales and higher manufacturing costs, primarily related to absorption from lower production, partially offset by significant cost control measures throughout the enterprise.
On a year to date basis sales were down 19%, resulting in an adjusted diluted EPS of $3 14 down 36%.
The entire enterprise remains focused on reducing operating expenses, which were down $43 million versus first half of 2023 levels.
Finally year to date operating deleverage of 27% remain slightly higher than the midpoint of our assumptions and our downside scenarios, but has been negatively impacted by unique factors, including increased discounting elevated depreciation expense primarily related to recent capacity projects into fall.
<unk>.
And lower absorption across the enterprise due to lower production volumes.
Now, we'll look at each reporting segment, starting with our propulsion business.
Sales in our propulsion segment were down 21% with lower production rates at OEM boat manufacturers, resulting in fewer engine orders in the quarter.
Repower shipments were slightly up versus Q2, 2023.
The high margin controls Riggings and props business had slightly lower sales, but higher adjusted operating margins than prior quarter led by a strong aftermarket performance.
Adjusted operating margins were below prior year, primarily due to the impact of lower net sales and higher manufacturing costs, including absorption for lower production.
Partly offset by the lapping of prior year unfavorable capitalize inventory variances and accelerated cost control measures.
Our aftermarket lead engine parts and accessories business had a strong quarter with sales margins and operating earnings up versus second quarter of 2023.
But the transition to the browser getting added distribution facility now complete.
This was able to service products and customers around the globe, leading to year over year sales increases in both the U S and international markets.
<unk> group reported a sales decrease of 8% driven primarily by reduced sales to marine Oems as they bounced production levels to match retail ordering patterns, partially offset by strong new product momentum and while slow some improvement in our V C.
Those trends.
Segment adjusted operating earnings decreased as the impact from lower sales and increased discount activity was only partially offset by lower operating expenses.
Finally, our boat business delivered steady results. Despite planned softer wholesale orders as its channel partners continue to order cautiously partially offset by the favorable impact of modest model your pricing and share gains.
The segment delivered adjusted operating margins within expectations as the impact of the net sales declines and lower absorption from the reduced production was partially offset by pricing and continued cost control.
Freedom Boat club, which is included in business acceleration had another solid quarter contributing approximately 10% of the boat segment's revenue during the quarter, while seeing very steady membership growth despite the macroeconomic uncertainty.
We felt we could take a moment to remind investors how are shaping of the portfolio over the last 15 years has resulted in strikingly different financial performance. Despite a very similar retail boat market.
Yeah.
So let me tell you about the last time, when approximately 140000 bulk units where retail in the United States.
That year Brunswick, CAD, three 4 billion of sales and lost more than 50 cents a share.
Since that year Brunswick has more than tripled the size of its aftermarket PMA business divested noncore businesses and gained more than 1000 basis points of share in outboard engines.
Our boat business is much healthier leaner today than it was in 'twenty, Ted as evidenced by this business being strongly profitable this year versus losing significant earnings and 2010 on similar global wholesale orders.
Finally, we are keenly aware that our current guidance of slightly below the six dollar downside case, we laid out several years ago.
Although we would argue that we're still well within a reasonable margin of error for this type of exercise the main components impacting the guidance or the reset of our P&A businesses. After the post going to stocking and more cautious wholesale ordering patterns and all of our businesses, despite elevated discount and promotional activity.
Which more than offset the better deleverage in our boat business larger market share gains by Mercury and benefits from cost efforts and higher share repurchases during the period.
With the majority of the retail selling season behind us. It is evident that the 'twenty 'twenty four U S. Marine retail market is underperforming in peak season versus our initial expectations and is likely to end the year at unit level similar to 20 Ted.
The macroeconomic environment remains uncertain and while there is now a higher probability of interest rate relief beginning in September.
Would occur after the main selling season and will likely have an immaterial impact on our 'twenty to 'twenty four results.
Potentially provide a tailwind for 2025.
In this environment, our OEM customers and channel partners continue to order cautiously.
And we do not foresee this pattern changing significantly through the remainder of this season.
In these challenging conditions, our resilient recurring revenue businesses and channels, including our engine parts and accessories Freedom boat club and the aftermarket repower sales in propulsion and advocacy group are fully demonstrating their earnings and cash flow power.
Through the balance of the year, we will continue to launch many exciting new products to support future share gains, while focusing on delivering yearend inventory levels in line with historical norms.
Executing our strategic plan investing in our long term growth initiatives and expect to deliver resilient EPS and cash flow.
The result is the following updated guidance to match these market realities, including net sales of between five two and $5 4 billion and adjusted diluted EPS in the range of $5 to 5050 cents, while keeping free cash flow guidance in excess of $350 million.
Please see the appendix for additional guidance regarding anticipated segment metrics.
I will wrap up the financial update by sharing certain updated P&L cash flow and other capital strategy assumptions for the full year.
With only two items that have materially changed since our April call.
First we continue to moderate our capital expenditure spending for the year and now anticipate a 175 million of Capex spending for the year.
There's some out remains far in excess of maintenance capital levels and still allows our businesses to continue with their key growth initiatives.
Second furthering our balanced and flexible approach to our capital strategy, we have revised our plan to repurchase between 200 and 220 million of shares in 2024, consistent with our initial assumptions for the year and have completed $170 million through the second quarter.
We plan to spend around $20 million each quarter going forward on share repurchases balancing repurchases and debt reduction to gradually achieve our desired debt leverage targets.
I will now pass the call back over to Dave for concluding remarks.
I'm excited to close our prepared remarks by highlighting some of our recently launched new products and other exciting developments.
Speaker Change: Like continues to expand its product line with the introduction of the ultra LTE foil a lightweight slim board designed for high maneuverability.
Speaker Change: During the quarter, we opened the order book for the award winning Abbott's or 75 M. One Saudi electric outboards the.
Speaker Change: The most powerful engines and the avatar family are well suited for powering a variety of vessels, including pontoons run abouts and rigid and flexible.
Among 18, new or updated Brunswick boat models launched so far in 'twenty 'twenty four.
<unk> theory, SPX 119, and SPX 119, outboard models, featuring the new theory design language. Many class leading features were introduced.
Navajo group attended the worlds largest fishing show Ikaes and showcased several exciting new products from the semi and Lawrence brands, including the innovative new recon electric steer trolling motor.
Which is being developed for both freshwater saltwater anglers features a unique joystick remote.
Speaker Change: In addition, the Lorentz brand also launched Eli.
Speaker Change: A highly accessible all in one live sonar solution combining chip in town scanning one transducer, along with detailed seem up shopping.
Speaker Change: In the quarter Brunswick brands 111 top product award from boating industry magazine for the second consecutive year and not to be outdone Freedom boat club continues to expand geographically with the recently announced additional flagship locations in Copenhagen and the London.
That's the end of our prepared remarks, we'll now open the line for questions.
Thank you.
Speaker Change: Ladies and gentlemen, we will now be conducting a question and answer session.
Speaker Change: If you would like to ask a question. Please press star and one on your telephone keypad a.
A confirmation tone will indicate your line is in the question queue.
You May press star and two if you'd like to remove your question from the queue.
For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star Keith.
Ladies and gentlemen, we request you to restrict to one question and one follow up question, Bob Potter spin.
Our first question comes from the line of Fred Wightman with Wolfe Research. Please go ahead.
Hey, guys. Thanks for the question I'm wondering if you could just give us maybe a high level.
Update on how you're getting to that 10% retail number now I know that there's been some disconnect between what you've seen with your internal registration as from what we've seen from Ssi, but just given sort of the state of the macro and what you've seen from the.
Past month or two you know what gives you confidence in the updated target.
Yeah, Hi, Friday stadia, yeah, So [noise], yes, it does.
Normal overtime, I think the our internal retail projections and Ssi will.
Speaker Change: A line, but as you know it normally takes a few months to do that.
Through Q1, we were at kind of our internal retail was about flat up slightly ahead of the market and then through Q2.
We saw a weaker may it was down about eight something maybe 8% to 10%, which we expected.
Because of the model year changeover that was happening in June.
What we hoped and anticipated was that the new models in June but capitalized some increase in retail but that didn't happen.
Speaker Change: In our June is down about 20% essentially in line with Ssi the difference with Ssi as some of the states that report late some of the states that we have the highest market share in particularly in the Midwest, where all freshwater.
Alex So we're pretty aligned with what's going on with.
Alex: Ssi at the moment with those caveats.
So you could call it the market really be down you know high singles Yeah, It could be.
But given the uncertainty level at the moment I think 10% is high singles to 10 is probably reasonable.
July is better than June.
Still down maybe kind of mid to high singles at the moment, but that would still give us.
You know something in the high singles to 10 at the end of the year, but but somebody get through July through 75% of retail so the ability to.
Alex: Shifts that employed much is diminished after the end of July.
Speaker Change: Yeah.
That makes sense.
Speaker Change:
Thinking about the dealer inventory target.
For year end, you guys talked about the 7% decline.
I'm thinking at a high level. If you if you get there and you hit that target and you think about 2025 do you think 25 is sort of retail and wholesale are in line do you think that there's restocking that needs to happen.
How do you think about this setup.
Speaker Change: Well I think we're.
Speaker Change: We're approaching the year end with a conservative view on inventory and when I say conservative It mean were.
We're at the low end of what we think is going to be necessary for a 2025.
And we could talk about 2025, you know at some point, maybe during the call, but but I feel as though on a.
Speaker Change:
But the cross sell various segments with that level of inventory.
We will have a de risked any scenario any reasonable scenario for 2025.
Look across inventory levels across the various segments that very balanced everywhere.
So by the end of the year, a lot of our value products and aluminum will be kind of relatively down.
Oh, the premium fiberglass will be up a bit versus the end of last year, but really that's necessary because we were under inventoried in those segments are performing relatively better so I.
I think that's.
But better to be a bit conservative at this point in time I think.
Fair enough. Thank you.
Yeah.
Thank you.
Our next question comes from the line of Mike Swartz with cruise Securities. Please go ahead.
Hey, guys good morning.
Maybe just to start and at a.
Speaker Change: High level broad brush strokes is there any.
Way to think about you know what maybe the initial dealer volume commitments for your model, you're 25 product looks like.
Speaker Change: At this time.
This year versus last year I know, there's some differences in the timing of the model year changeover and probably when the dealers are thinking about accepting more inventory, but just very high level is there any way to think about what that looks like.
Yeah, Hi, Mike Yeah.
At the moment more than 70% of <unk>.
Our plant production for Q3 as is accounted for with orders.
But which is relatively normal for us.
So with brands like Boston whaler, 200% accounted for it with some of the aluminum brands, where we have smaller boats.
You know all the way down to you know a few thousand dollar boats, that's pretty normal as well so I think.
Pretty comfortable with the position we're in for orders for the third quarter, we know less about Q4 at the moment.
Yeah.
Speaker Change: Okay, and then just on the on the cost reduction program I guess I'm trying to understand it seems like it equates to something in the $70 million to $80 million range.
Speaker Change: Just trying to understand is that is that an annualized number it sounds like that that's just for 2024 and then how much of that is actually variable, meaning how much of that would come back if and when production comes back.
Yeah, Mike I'll take this good morning, as you know by the end of the year Opex is going to be down pretty close to $130 right or you know somewhere 90 to 100 million, which is about 10%.
Speaker Change: Of that you know a chunk of that is compensation expense, which will obviously be a pretty low this year, given where we are versus our targets that that portion we would expect to come back obviously and we'd reset that at 100% to start 2025.
And then there's pieces that obviously are being delayed spending in 'twenty four and then we would also want to come back to <unk> to 'twenty five given a better market environment, but it's fair to say that about a third of that we would say is complete take out then we would keep out for the very near certainty.
Near term I would not be added back until or if at all when market conditions improved and we were able to spend a little bit more for growth.
Speaker Change: I think the third is really for 'twenty 'twenty four as well so the.
The impact of that food on 2025 on a run rate basis would be yeah.
Okay, great. Thanks, a lot.
Speaker Change: Yeah.
Thank you.
Speaker Change: Next question is from the line of Matthew Boss with J P. Morgan. Please go ahead.
Matthew Robert Boss: Great. Thanks, Dave.
Matthew Robert Boss: Dave maybe could you elaborate on on more recent trends that you're seeing in the marketplace. If if you broke it down across premium versus the value channel and just larger picture how best to anticipate the progression into 2025, if you looked back at prior cycles.
Oh, yes, certainly.
So I guess, what we're seeing.
Premium is it still.
Somewhat stronger than well you.
But I would say the other thing that we're seeing is that generally fishing related products all the way from.
Boston Whaler saltwater fishing at the high end through to some of our aluminum fishing at the more value in kind of core part of our market are all relatively strong.
And the more general purpose kind of general recreational products seem to be performing somewhat weak.
So that would be things like value fiberglass run abouts.
Pontoons.
Definitely down more than the market.
At the moment.
So those are a couple of ways to.
To kind of break it down at the moment I think you know we're fortunate in being strongly index too.
Fishing, probably about two thirds of our products are fishing related.
Products. So so I think the strength of that part of the market continues to.
To favor to favor us going forward.
So yes it is.
Those people who are committed to voting not just for boating, but for other activities like fishing seem to be prioritizing our spending this year versus others, who may be.
I'm more inclined to trade off one activity a bit more for us is another.
Great and then Ryan just as we think about industry recovery over over time, what's the best EBIT flow through rates or incremental margins to consider for 2025, just given reductions that you've made on the operating expense side.
Yeah. It's a good question and maybe I'm going to I'll go ahead, and just tackle twenty-five our views on 25, given given your question, but the short answer there is we.
<unk> believe that we can lever up.
Criminals at 20% or more.
And frankly, we've de Levered this year at about that same pace, if you normalize for absorption.
And discounting that that 27% year to date number would love just about right at 20, maybe even a little bit below but but the way to think about twenty-five for US first it starts to consumer we're obviously, assuming slightly hopefully healthier economic conditions a rate environment that has begun to come.
Down, but still employment being low GDP still being relatively relatively resolute. Obviously November it's got US there was some uncertainty end of the range, but we'll get through that as we always do.
The resolve there would probably be some some stability in the marine market just as an aside where we're likely to finish the year main powerboat segment at about 140000 units that is 5% above where.
Where we were coming out of the GSC, which was a much tougher macro economic environment.
I think it's reasonable to assume a market and obviously not making a call on the 25 market yet, but I think it's reasonable to assume that a flat market to this year is kind of a floor with some upside into low or even mid single digits, which you'll get back half of the market losses. This year and would also represent.
A retail level that is approximately 50% of what we would consider replacement level for the U S market.
So from that and you go to the wholesale retail dynamics, which Dave touched on earlier, but in a flat market and wholesale matching retail you'd get about 500 boat units back together with the accompanying engine units are not only in our boats, but all across the OEM landscape, which by the way.
We keep gaining share at Mercury, it's we understand that the market is a little softer, but one thing that you can always count on is continued market share gains.
If you then want to assume that retail next year is slightly up then you can get to a world where wholesale next year is 10% at units or more greater than this year and again with the benefits on the engine side to.
That if you look at the Brunswick specific dynamics again Mercury continues to take share with new products coming.
<unk> stability and growth in engine DNA I know, it's been a bit of a sore subject for a couple of quarters six quarters, but that edge of TNA aftermarket recurring business.
<unk> is showing exactly why we built it up to what it is today and that is growing in a market that our new sales are down. So we've continued stability there and engine DNA I.
I would say navigator is really where you're going to start to see some improvement both on the margin and sales side on the benefits from the cost takeout actions and significant new project products and possibly it has to happen someday and I'm gonna improved RV market, which remember navigator touches about 10%.
And then you have the positive impact from Opex as we talked about earlier.
And just an overall drive of cash.
I'll take the capital strategy gains share repurchases and in a likely lower interest expense with some that work we're going to do so the way to look at.
Well see where twenty-five lands here as we get closer to the end of the year, but it sure seems like there's a lot more tailwind than headwind both for the market, but certainly on the items that are there product and control.
That's great color best of luck.
Thank you. Our next question is from James Hardiman with Citi. Please go ahead.
Hey, good morning, guys. Thanks for taking my call.
I was kind of in and out in the early part of Q&A you already answered this I apologize, but that the bridge on slide nine, but that $2 20, and marketed and pipeline correction.
Do you get any of that back.
Let's say for the sake of argument a flat market.
One to one wholesale to retail you're going to hear that through 'twenty back you talked about the 85, but I'm curious about that other big negative.
We do we do James and and you know in a in a flat market you could assume we get you know 500, plus back and then the associated NGL benefit too and again.
If wholesale matches retail we get the benefit with our boats, but also putting our engines on you know 48 plus percent of the boats in the U S. A.
Even more with multiple engines and then if you can assume retail slightly up yeah, you're in a world where wholesale could exceed a wholesale this year by 10% plus so yeah, you're getting okay.
Definitely get a big chunk of that back.
Got it and then I mean, you touched on this Brian the notion that we're basically back at G. S C level of retail.
And we still haven't seen a recession, yet I guess I could I could put a bullish or bearish spin on that its a bearish then would be that this is a market that's in.
Big time secular decline right.
But even in a relatively healthy macro environment, obviously not for your industry, we've seen massive declines.
I guess the bearish view on that would be you know this is the work of the fed and interest rates and everybody sort of underestimated just how interest sensitive.
These purchases are and once interest rates begin to come down we don't need to wait another decade core for demand to sort of Reflate I'm curious your thoughts on on Big picture just.
Obviously, the retail is missed everybody's expectation by us by a good amount over the last couple of years thoughts on what you think this means going forward.
Yeah, James So a good question I think I think the.
Speaker Change: You know broadly.
Any studies do you look at on demographics through 220, 30, and we've mentioned this before suggests that the world you're going to get wealthier.
Generally that's supportive of US just like it is for.
A range of other discretionary items.
Items I do think what we're seeing is a couple of things here. One is a course that you mentioned the interest rate environment and you mentioned that these.
She says are interest rate sensitive.
Cause they are but I do think that there are a couple of other kind of layers of impact of interest rates, particularly for some of our core consumers. It's not just about the fact that financing to purchase is more expensive. It's the overall that budget suppression more bi.
Cumulative inflation and interest rates on other finance purchases.
Not to mention the fact that.
It's a confidence issue there. So I think there are various dimensions that are influencing discretionary repurchases at the moment beyond simply the finite increased financing costs.
I think over time, what we've seen with.
The impact of inflation is going to be.
Kind of.
Boy that kind of.
Average out over time, the last couple of years with a relatively small increases in certainly we would anticipate that next year.
So I think there are a number of factors that are in play here cumulative inflation, the secondary and tertiary impacts of interest rates.
But a larger barriers or inhibit system, we had anticipated, but I do think that there's no reason to believe that there's.
A secular negative.
And here.
We we always also.
<unk> outperformed the market and generally we've continued to do that.
Particularly obviously on the engine side, but with some of our boat brands, which have gained share year to date like Boston whaler and sea.
Right, but that support that kind of wealth accumulation trend I.
I would also add James you know one stat that we look at pretty pretty carefully as participation across the industry. You know registered boats continued to be north of 10 million just in the U S alone and then you have on top of that all the growth in the shared models, which were leading the way there and freedom. So I would caution taking.
New boat sales as the main metric on a you know calling something secular when people are out their boating as much if not more than they have been in past years, and I would say new product sales or are you know softened for all the reasons, Dave said, but participation remains strong we don't see any we don't see any cracks.
And that and that participation trend.
Got it thanks guys.
Thanks James.
Thank you.
Our next question is from the line of Megan Alexander with Morgan Stanley investment managers. Please go ahead.
Hi, Thanks, so much for taking our question I wanted to spend a little bit of time on the propulsion segment in particular, so maybe the first question on the topline and then I'll ask a follow up on the margin. So you know it does seem like the the bulk of the reduction on the top line to the guide. This year is coming from propulsion I think if I'm doing the math right.
Looking for declines in the back half kind of similar to what you saw in the first half I was curious you know I think you said in the prepared remarks retail engine retail for the industry was down six until Q, but was wondering if you could let us know how how mercury compared to that and then just maybe parse out you know and the updated guide.
Speaker Change: From a top line perspective, how should we think about you know kind of the impact of of.
Speaker Change: Lower retail than you expected and perhaps taking some units out of the channel in that segment.
Yeah.
We could do together yeah. So yeah. So I think the the impacts that you're seeing on propulsion or a couple of things at the moment.
In terms of you know, how how much down as mercury versus others, what our share is up year to date. So we're obviously less down than.
Then the market and we would anticipate that through this year, we will continue to gain share in Mercury No reason to believe that we won't.
The good news in propulsion at the moment is that obviously, we've had to adjust production down.
To to support market conditions, which are lower than we anticipated, but we've taken pretty prompt action on that the other thing that youre seeing though is that a significant destocking trend ads.
OEM customers.
And now we look at retail and wholesale across every segment of our oil production and they are back in balance.
So I think that's a good.
A good trend for us that means that any increase or growth in retail, it's going to flow pretty directly.
Back to Mercury.
But we are in a situation in which Oems or just not wanting to take any product that they don't think it's going to go on the back of a boat in 'twenty 'twenty four.
No we have production available, which is not always the case in the past so.
Speaker Change: You know as <unk>.
Many other areas that they are they are ordering.
Kind of smaller quantities more frequently and making sure that they match what their use patents are gonna be did you want to pull them. All just wholesale units for engines is going to be down about 20%. This year, which is roughly close to one votes would be which is down 24%, but you're going to see a lot more of that in the back half.
<unk>, just because of production schedules.
We're still pretty good in the first half we have enough inventory as Dave said OEM orders did slow quicker than we thought.
Speaker Change: Again, not not because of their choosing other engine providers, but just because production at our OEM partners slowed quicker get them through the through the first couple of quarters. So the back half all you're seeing is the same dynamic that youre seeing in votes, just a little bit later in the year boats started taking a wholesale are really in the middle.
Last year, and you're just seeing it happen quicker in propulsion.
I would say engine pipeline, which again, we can't track, we don't track as closely but we do know that engine pipeline will be down from the start of the year, because we will be under shipping retail again to start us off on a really nice position in 2025.
Okay got it that's super helpful. Thank you and then just a follow up on on the margin line, what you're guiding for from a propulsion perspective, I think it's you know decently are solidly below 2019 levels. Yet you know sales are still well ahead and understand the impact that that production has on that I think can you just maybe provide some more color around.
The margin guidance I think it does imply some pretty steep decrementals in the back half to smell a tip to what you've talked about and then just tie it with you know I know a lot has changed in the air but in the last nine months ago, you talked about kind of a 20% margin for the segment. So is that is that still realistic to think about in a more normal environment or have things.
You know kind of changed too much.
Yeah, It's a very it's a fair question a good one I would tell you let me answer in reverse yes, Theres no reason that that at normal production volume in normal market conditions that the propulsion business can't be back at or above 20% operating margins. You know it is simply a volume game for the full year, that's driving that.
And down the absorption impact on the lower production is pretty significant call. It north of $30 million currencies are a little bit of a bad guy that you know that both of us in the first half, but that's really hurting and just overall, there's not something.
Speaker Change: It's not the Opex you can take out quick enough.
Coffee absorption and hit a hit there.
Also remember that depreciation is larger there this year because of all the capacity projects and capital we put in there.
Are you getting that impact of ahead without a accompanying sales, which we will get eventually so you're kind of getting a mismatch. There. So if we we agree it's certainly worse than we anticipated, but if you normalize takeout absorption in kind of the one timers you still in the mid to upper teens.
<unk> had at you know at a normalized volume you get a little bit more value back to our retail market that looks a just a little bit better and you're getting back closer to that 20%.
Speaker Change: Awesome that's super helpful. Thank you.
Thank you.
Our next question is from the line of Xian through the BNP Paribas asset management. Please go ahead.
Hi, guys. Thanks for the question.
Just curious about your your inventory target a reduction a four 7% like do you think that's enough relative to retail down 10%.
I think it implies much of our weeks on hand reduction.
Yes.
Speaker Change: Thanks for the question I think I mean, obviously, we have a number of considerations when we're trying to kind of target retail.
We think about weeks on hand, we also think about units in the field.
So when we think about units put dealer, which we've which we've talked about a lot. There there is a.
That's an issue that if we go down too low we just cant carry of references representative segment of our product line.
Speaker Change: Across the bulk of our dealers.
So we're trying to balance a number of factors yeah, I think if we.
If we consider one factor you might get one like a slightly different answer to another factor.
But the fact is that we are going to.
A significantly of the ship.
Retail this year and I believe still end up with.
A decent number of units that each dealer really the area, where we are gonna have or going to increase inventory slightly versus last year is in the premium end of our product lines, particularly Boston whaler and sea Ray.
We're still working our way out of a hole on those products through the last several years, because we couldn't catch up after the supply chain crisis. So.
Thinking about it in those different ways I think we feel that its a good balanced position to be in and Derisked 2025.
Okay got it really helpful. And then maybe on propulsion you know to your point the volume of wholesale volume declines are down kind of in line with new boat sales do you think the segment is becoming more.
Correlated to new boat sales are.
Are there are the kind of like the structural tailwind still intact and then also kind of pricing has been a price mix has been a big benefit is that under pressure at all or are you able to hold that and it's just volume that's coming down.
Yeah, no. It was yeah and I would say, it's just volume in fact Repower sales continues to be a pretty strong throughout the first half of the year, we still think that that's about 15% of the overall units 15 to 20.
But it's really just the OEM volumes that are you know that our sluggish, but we're not seeing any issues on on the price volume mix, obviously 300 horsepower above where our share is extremely robust its where we can take the most price because we're we're you know.
Speaker Change: We're the only engine in town for anything kind of four 506 hundred and and certainly we believe are our all of our high horsepower products with best in class. So we're still able to get a premium there and don't see that changing.
Okay. Thanks.
Thank you. Our next question is from the line of Craig Kennison with Bad. Please go ahead.
Hey, good morning, Thanks for taking my questions as well you mentioned floor plan interest cost for dealers I'm. Just wondering if there are metrics you can point to that would help us frame that additional expense, whether it's just the the rate they face or the percentage of their gross profit today versus prior peer.
<unk>.
Yeah, Greg It that's that's tough I mean, obviously there you can track the rate they're paying right. So are you.
With our benefit of having D. A C and our dealers are paying kind of a sofa plus the <unk>.
Plus the bank rate.
So for plus a percentage.
Speaker Change: So obviously that's up you know several points since 2021 and he can take the average kind of average floor plan there.
At times that that rate, but you know all in all I think the dealer network remains extremely healthy we get reports every couple of weeks on and on about our boats in the field that are aged at any.
Challenges in our dealers are having plant paying floor plan or <unk>.
Covering there you know covering their sales so we're not seeing any concerning trends in fact throughout the summer aged inventory Brunswick has been vital across the way, but aged inventory around all of the ACS portfolio has has gone down and we're seeing really good liquidations on buying anything.
More than a year old. So it you can you can do the math by just taking the sulfur plus the change in that.
Change in rates, but all in all still a pretty healthy environment.
And then shifting gears just a lot of this discussion has been the macro which of course, you don't control, but it seems like there is a self help opportunity at <unk> and I'm, just wondering where you think.
Speaker Change: What the current expectation is for a.
Speaker Change: I guess margin the margin profile of that business, if we get back to let's say 150000 boats.
Speaker Change: Yeah, I think youre right and obviously, we take that very seriously Craig and we're working on it very diligently including in terms of the footprint.
Close about 40% of the facilities that we've significantly reduced head count and where we.
Working very diligently on cost of sales.
So, but the cost of sales work that we're doing is not flowing quite yet because it's because we still have the inventory you know prior to some of those reductions it will start to flow through along with a stream of new products some of which we highlighted today.
So yeah.
I'm doing all the right things never go group I wish it had flowed through a bit earlier, but obviously the marine OEM environment on the I'll be OEM environment is is a.
Tough one.
However, aftermarket is doing better and making up for that which is why you see that kind of flat revenue by quarter and we have some great new products coming through both on the OEM side on the aftermarket side.
Great, Thanks, Dave and Ryan.
Thank you it's Greg.
Thank you Les.
Ladies and gentlemen, this concludes our question and answer session and at this time I would like to turn the call back to Dave for some concluding remarks, Dave.
Thank you very much and thank you all for joining us and for your questions. Although the peak season sales didnt.
Dave: To meet our initial expectations, we came pretty close to our Q2 guidance.
But it is clear that we are looking at a different back half of the year than we originally anticipated I am very very pleased though.
With the way our market share is holding up but also particularly with the way that our recurring revenue businesses are holding up P&A is performing very well Mercury Repower of Freedom boat club, we didn't even get a question on upper once this time, but it continues to grow memberships, it's grown about 3% in terms of memberships. This.
Uh huh.
So a lot of our great performance, there, which is driving really robust earnings and very strong.
Cash flow. So we're very excited about that part of the business and we are clearly positioning ourselves very very well for 2025 I.
I do want to end by just saying that we continue to focus on being an employer of choice. We have a great team of Brunswick.
Dave: Driving everything that you hear about.
And we recently were ranked number one in the engineering and manufacturing category and times best Midsized companies, which I think is a testament to how we run the business from a financial perspective from a personnel perspective and from a corporate responsibility perspective, so I'm delighted with that and wanted to.
Thank all of our employees.
Thank you all very much.
Thank you <expletive>.
Speaker Change: The conference of Brunswick Corporation has now concluded. Thank you for your participation you may now disconnect your lines.
Okay.
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Okay.
Okay.
Uh huh.
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