Q3 2024 Brunswick Corp Earnings Call
Good morning, welcome Chip friendship Corporation's third 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.
Speaker Change: I'd now like to introduce now Clark Senior Vice President Enterprise Finance Friendship Corporation.
You may begin.
Speaker Change: Good morning, and thank you for joining US with me on the call. This morning are Dave Foulkes, Brunswick's, CEO and Ryan <unk> CFO.
Speaker Change: 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.
Speaker Change: 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 Dot com.
Speaker Change: During our presentation, we will be referring to certain non-GAAP financial information.
Speaker Change: Reconciliations of GAAP to non-GAAP financial measures are provided in the appendix to this presentation.
Speaker Change: And the reconciliations section of the unaudited consolidated financial statements accompanying today's results I will now turn the call over to Dave.
Dave Foulkes: Thanks, Nick and good morning, everyone.
Dave Foulkes: All businesses delivered solid results in the quarter as continued market share gains.
Dave Foulkes: Wealth of new products and expanded contribution from recurring revenue businesses resulted in financial performance in line with expectations. Despite the challenging marine market.
Dave Foulkes: We continue to tightly manage field inventory across all channels.
Dave Foulkes: Adjusted production accordingly, ending the quarter with 10700 units in the U S pipeline around 200 units below prior year.
Dave Foulkes: Our third quarter results again demonstrated the resiliency of our portfolio with our recurring revenue businesses and channels.
Dave Foulkes: <unk> engine P&A business propulsion is repo business Freedom boat club and medical groups aftermarket sales contributing nearly 70% about Q3 adjusted operating earnings.
Dave Foulkes: As we enter the final months of the year, we estimate full year, New boat retail unit sales to finished in line with our expectations of down approximately 10% versus prior year.
Dave Foulkes: With the core retail selling season behind us and retail discounting levels remaining elevated.
Dave Foulkes: He led reordering and some segments is slower than anticipated.
Dave Foulkes: Leading most boat Oems the maintained lower production rates.
Dave Foulkes: Propulsion and ethical group OEM orders.
Dave Foulkes: However, after market based engine parts accessories, and distribution businesses and freedom boat club continues to perform well as boating participation remains strong.
Dave Foulkes: Prudent capital management remains a priority and we recently executed an amendment to our revolving credit facility.
Dave Foulkes: Increasing the commitments to $1 billion and extending the maturity to October 2029.
Dave Foulkes: We also increased the size of our commercial paper program.
Dave Foulkes: The issuance of commercial paper notes also up to $1 billion to provide further capital flexibility.
Dave Foulkes: In addition, our businesses delivered strong cash flow, enabling us to complete $190 million of share repurchases year to date.
Dave Foulkes: In maintaining our commitment to return value to shareholders.
Dave Foulkes: Yeah.
Turning to some highlights from our segments in the quarter.
Dave Foulkes: As anticipated our propulsion business delivered lowest sales and operating earnings versus the third quarter of 2023.
Dave Foulkes: But we continue to outpace the market at retail and gains of 420 basis points of U S outboard engine share in the quarter.
Dave Foulkes: We are currently producing at rates significantly below retail as OEM customers maintain reduce boat production schedules into the off season.
Dave Foulkes: Our engine parts and accessories business had another strong quarter with record operating margins of 26% and with both the products and distribution businesses contributing to margin expansion despite slightly lower sales.
Dave Foulkes: The complete the transition of engine parts and accessories distribution to a new state of the facility in Brownsberg, Indiana continues to provide efficiency and delivery time benefits.
Dave Foulkes: Labeling modest international sales growth versus the prior year quarter.
Dave Foulkes: As anticipated medical group has lowest sales and operating earnings.
Dave Foulkes: Third quarter of 2023.
Dave Foulkes: Due to continued soft marine OEM order rates and retailers delaying aftermarket orders until closer to the holiday selling season.
Dave Foulkes: Which was partially offset by slightly higher sales in the Europe Middle East and Africa region.
Dave Foulkes: Our pace of product investments is showing benefits.
Dave Foulkes: <unk> at the recent can Y'all think festival.
Dave Foulkes: <unk> group's products will present on approximately 70% of books exhibited.
Dave Foulkes: I'll provide more details on topical group new product introductions in a moment.
Dave Foulkes: Finally, our boat business had sales and operating earnings below the third quarter of 2023.
Dave Foulkes: System with lower planned production levels and fewer manufacturing days due to the extended summer shutdowns.
Dave Foulkes: Freedom Boat club continues to deliver steady performance with three 5% year to date membership sales growth.
Dave Foulkes: In addition, we completed the acquisition of the South Florida franchise operations and territory.
Dave Foulkes: Further solidifying freedoms leadership position in the largest boating states in the U S.
Dave Foulkes: We expect to enter the Asian market in the near future.
Dave Foulkes: Yeah.
Dave Foulkes: Now the Ko group is continuing to invest in an accelerated introduction of new products developed since the acquisition.
The elite F S 10 inch and 12 inch fish finders with.
Dave Foulkes: Live sonar unfold networking capability will launch today to fulfill the needs of consumers, who didn't buy a larger screens with premium features at an affordable price.
Dave Foulkes: These products are amongst more than 20, new products introduced across the Napa Ko group portfolio year to date.
Dave Foulkes: Some of these new products are launching in time for the E Commerce and holiday season.
Dave Foulkes: And we expect them to contribute to some operating margin re expansion in the fourth quarter.
Dave Foulkes: While the number of white space products opening expanded market opportunities.
Dave Foulkes: In the third quarter, we launched the new lower end Eagleye nine first entry level fish finder, and the market offer lives sonar capability.
Dave Foulkes: Even as we continue to rationalize its global footprint. We're also continuing to build Nabucco group product development capabilities and expect to launch an additional 20 exciting new products over the next three quarters.
Dave Foulkes: Turning to external factors, while the macroeconomic landscape is stabilizing with inflation continuing to moderate unemployment generally remaining solid we continue to monitor the escalating geopolitical tensions and election related activities.
Dave Foulkes: The downward movement in interest rates in the U S and some other markets since the beginning of the quarter is welcome and it's already benefiting consumer financing costs and dealer floor plan costs.
Dave Foulkes: Oh about given the points in the current retail selling season, we do not anticipate benefits until 2025.
Dave Foulkes: Dealer sentiment is generally stable, but negative with ordering remaining cautious in most segments.
Dave Foulkes: We do not anticipate any significant change entering the off season curtailment holiday.
Dave Foulkes: Discounting and promotional levels remain elevated.
Dave Foulkes: Our investments in our digital assets continue to drive solid lead generation and conversion.
Dave Foulkes: Despite these challenging conditions, our surveys do show some improvement in bulk purchase consideration.
Dave Foulkes: Particularly among higher household income consumers.
Dave Foulkes: We continue to invest in our launched many exciting new products and technologies across all our businesses and product lines with.
Dave Foulkes: With the intent to position us for market share gains and to ensure we have the freshest portfolio when the market returns to growth.
Dave Foulkes: As we all know at the end of September early October Florida in the southeastern U S experienced two major hurricanes.
Dave Foulkes: Oh Brunswick has a strong presence in Florida with only a minor direct impact to our facilities.
Dave Foulkes: Duction and distribution halted at some locations for approximately three days a hurricane preparation and then a few cases to power outages.
Dave Foulkes: Brunswick suppliers in the region will also largely unimpeded.
Dave Foulkes: Of the approximately 100 corporate and franchise owned Freedom boat club locations in Florida.
Dave Foulkes: Full will remain close for infrastructure repair exiting October.
Dave Foulkes: Some Brunswick channel partners and could damage to their facilities, which in combination with direct impacts to both us and consumers in the area will have a modest short to mid term impact.
Dave Foulkes: We estimate our full year operating earnings impact of $5 million to $10 million.
Dave Foulkes: Brunswick is providing financial support supplies and essential needs the impacted employees and communities.
Dave Foulkes: Moving now to U S industry retail performance.
Dave Foulkes: U S outboard engine industry retail units declined 10% in the third quarter versus prior year.
Dave Foulkes: With Mercury Marine outperforming the industry, but down just one 8%.
Dave Foulkes: As mentioned Mercury Marine continues to gain share.
Dave Foulkes: Approximately 50% U S outboard engine market share in the third quarter.
Dave Foulkes: We are diligently monitoring bolt pipeline levels and continue to under ship retail.
Dave Foulkes: Exiting the third quarter with 10700 units in U S pipeline slightly below prior year.
We ended the third quarter at 32 weeks on hand, with premium fiberglass pipelines remaining well below historical levels.
Speaker Change: I'll now turn the call over to Ryan to provide additional comments on our financial performance and outlook.
Ryan: Thanks, Dave and good morning, everyone.
Ryan: Third quarter results were inline with expectations, but remained below prior year due to the continued challenging U S retail marine market.
Versus the third quarter of 2023 net sales in the quarter were down 20%.
Ryan: With adjusted operating margins of just under 10%, resulting in an adjusted EPS of $1 17.
As mentioned our results in the quarter again demonstrated the resiliency of our portfolio with our recurring revenue businesses and channels contributing a significant portion of the operating earnings this period.
Ryan: Third quarter sales were below prior year as the impact of continued lower wholesale ordering by dealers and Oems combined with higher discounts in certain business segments was only partially offset by annual price increases and benefits from well received new products.
Ryan: Operating earnings were down versus prior year as a result of lower sales and the impact of lower absorption from decreased production levels, partially offset by new product momentum annual price increases and ongoing cost control measures throughout the enterprise.
Ryan: On a year to date basis sales were down 19%, resulting in an adjusted diluted EPS of $4.31 down 41%.
Ryan: Gross margin performance remained steady despite the top line softness while operating expenses are down more than $15 billion versus 2023 levels, even after absorbing the impact of acquisitions as the entire enterprise remains focused on reducing controllable costs.
Ryan: As a reminder, we are making conscious decisions to ensure our field inventory levels for all our businesses remain appropriate and have scaled production accordingly.
Ryan: Year to date production for outboard engines, 75 horsepower and above is down 29% versus 2023 with boat production down 34%.
Ryan: Now, we'll look at each reporting segment, starting with our propulsion business.
Ryan: Sales in our propulsion segment were down 32% with lower production rates at OEM boat manufacturers, resulting in lower engine orders in the quarter versus the prior year quarter.
Speaker Change: As Dave mentioned earlier, despite lower wholesale orders as we anticipated we continue to take market share and outpace the overall market performance.
Speaker Change: Adjusted operating margins were below prior year, primarily due to the impact of lower net sales and lower absorption from declines in production, partially offset by cost control measures.
Speaker Change: Our aftermarket lead engine parts and accessories business had another strong quarter with record.
Speaker Change: Adjusted operating margins, leading to strong operating earnings growth versus the third quarter of 2023, despite slightly lower year over year sales.
Speaker Change: The completed transition to our new state of the episode and browse Berg, Indiana continues to provide efficiency and delivery time benefits, what's enabled modest international sales growth versus the third quarter of 2023.
Speaker Change: Our U S based land and sea distribution business also continues to take market share gaining 60 basis points of share in the last 12 months, culminating in September where they delivered their highest ever single months market share of just under 50%.
Speaker Change: Never called group reported a sales decrease of 14% primarily driven by reduced sales to marine Oems, resulting from lower boat production levels to match retail ordering patterns, partially offset by slight international sales growth and strong new product momentum.
Speaker Change: Segment operating earnings decreased as the impact from lower sales was only partially offset by lower operating expenses.
Speaker Change: Finally, our boat business had sales and operating earnings below the third quarter of 2023, consistent with lower planned production levels and fewer manufacturing days due to the annual summer shutdowns.
Speaker Change: Sales were down 19%, resulting from lower wholesale orders as channel partners continue to order cautiously and higher incentives and discounting were only partially offset by the favorable impact of modest model your pricing.
Speaker Change: Segment operating earnings were within expectations as the impact of net sales declines and lower absorption from the reduced production was partially offset by pricing and continued cost control.
Speaker Change: Freedom Boat club, what's contributed 12% of the segment sales in the quarter continues to deliver steady membership sales growth and completed its acquisition of the southwest, Florida franchise operations and territory further solidifying its leadership position in the largest boating states in the U S.
Speaker Change: Turning to guidance, we are not anticipating any change in market conditions for the fourth quarter and are responding by continuing to moderate production to ensure inventory levels in the channel remain appropriate setting us up for what we anticipate is a stronger 2025.
Speaker Change: In addition, we anticipate boat dealers remaining cautious in taking on product before early 2025 boat show season, especially knowing that we have manufacturing capacity available to get them product early in the 2025 retail season.
Speaker Change: Similar to our own boat prejudice OEM customers of Mercury and advocacy group to moderate production, resulting in softer wholesale conditions.
Speaker Change: As Dave discussed earlier, a modest negative earnings impact from the Hurricanes that impacted Florida, and the southeast U S.
Speaker Change: Our recurring revenue businesses, continuing to remain steady, albeit with normal seasonality impacting sales volumes.
Speaker Change: And lastly, Q4 production continuing to trail 2023 levels.
Speaker Change: The result is the guidance you see on this slide including net sales of $5, one to $5 2 billion and adjusted diluted EPS of approximately $4 50.
Speaker Change: Free cash flow continues to be solid despite the lower earnings with free cash flow conversion expected to be north of 80% for the year.
Speaker Change: I will now pass the call back today for concluding remarks.
Speaker Change: Before we conclude despite the challenging market I am thrilled to highlight the exceptional accomplishments of our teams from across the enterprise that were recognized with a record high number of awards in the third quarter.
Speaker Change: We've now surpassed the 100 major enterprise awards for the third consecutive year.
Speaker Change: Brunswick was named one of the world's best companies by time magazine, and we continue to win Global awards for our products around the world.
Speaker Change: Sea Ray one the more to both magazine Motorboats with year Award for its new 190 S. P X model.
Speaker Change: Well to a boat is the largest marine publication in France.
Speaker Change: Also flight recently took an Australian good design awards, including a best in class winner for its Marc Newson collaboration.
Speaker Change: During IBEX in October Medical group, one the IBEX Innovation award in its category the link co pro control boat stabilization system.
Speaker Change: Our Mercury received an honorable mention in the same category, Chris New precision joystick system.
Speaker Change: Finally safety on and off the water remains our top priority.
Speaker Change: So it was very rewarding to receive four national boating Safety Awards.
Speaker Change: For our boat class business and one each for our freedom and Bayliner brands.
Finally, we are very excited about the upcoming Fort Lauderdale boat show.
Speaker Change: Which we will beat the viewing many industry, leading new products.
Speaker Change: Boston Whaler will launched the all new 330 vantage the new flagship model in the popular vantage series.
Speaker Change: Sea Ray will show three all new models and it's S. D X line all powered by Mercury outboard engines.
Speaker Change: We will officially debuted the first models and our new Nevada premium am adventure product line in the U S.
Speaker Change: Thank you for your attention.
Speaker Change: We will now open the line for questions.
Speaker Change: Thank you we will now be conducting a question and answer session. If he would like to ask a question. Please press star one on your telephone keypad.
Speaker Change: 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 alright.
Speaker Change: We ask that you. Please limit to one question and one follow up question one moment, while we poll for questions.
Speaker Change: Our first question is from Matthew boss with J P. Morgan. Please proceed.
Matthew Boss: Great. Thanks, So maybe first question, Dave could you speak to any changes in customer demand or any changes in dealer sentiment.
Matthew Boss: You've seen recently and just if you could elaborate on the drivers of the stronger 2025 setup that you cited.
Speaker Change: Oh, yeah. Thanks, Mike Yeah. So I think retail is pacing pretty much as we expected to down about 10%.
Speaker Change: September for Us actually came in a little bit stronger so that was nice to see but generally that kind of minus 10% at a consumer level is what we're seeing.
Speaker Change: I wouldn't say that there are wholesale changes in OEM.
Speaker Change: Mind kind of across the board, but we are seeing a bit of weakening in Europe, which has held up a bit better that tends to be a little bit more of a premium market suddenly for us.
Speaker Change: There's some weakening there and we did.
Speaker Change: Didn't want to de risk a bit the balance of the year.
Speaker Change: Just because we have just not quite got under some of the OEM.
Speaker Change: Pipeline dynamics previously.
Speaker Change: So I mean, you've seen even in some public company some changes in.
Speaker Change: The dynamics like you would expect for the balance of the year. So well, we're not seeing a significant further production reductions I think this is a bit more of a.
Speaker Change: But derisking exercise for the balance of the year one thing that is.
Speaker Change: Hmm.
Speaker Change: No clear at this point in the year is that we do not want to overstock pipelines and so.
Speaker Change: We're not intending to do kind of a lot of year end programming that would potentially pull wholesale out of early 2025 and enter 2024.
Speaker Change: So those are some.
Speaker Change: But you know considerations there will be a modest impact from the hurricanes that went through Florida. Obviously, if there were a number of people that were affected and we all hope that they recover very quickly, but we would expect.
Speaker Change: We expect some kind of west coast of Florida.
Speaker Change: Demand impacts based on the hurricane impact on our channel partners and also on the and consumers.
Speaker Change: You want to talk about.
Speaker Change: Yeah.
Matthew Boss: Good morning, Matt how are you Brian here.
Speaker Change: 25, I think our story is pretty similar to what it was on the July call, maybe just moved up.
Matthew Boss: 90 days or so.
Matthew Boss: We still think that 2025 on balance is likely to see healthier economic conditions FERC.
Matthew Boss: For our consumers lower interest rates unemployment continues to be relatively low.
Matthew Boss: GDP that that has continued to be positive.
Matthew Boss: We see a little bit of uncertainty here in the next 90 days certainly with the election, maybe extending into the first quarter, but all in all macro and consumer probably are in the plus column and then you have to ask yourself. What you think the market's going to do the marine market, we're going to end the year. This year at about 140000 units here in the U S, which is really only about.
Matthew Boss: A handful of percent above where we were on a unit basis coming out of the GSC and so we we all think it's relatively reasonable to assume that a flat market. This year is definitely doable with probably an upside from there and then time will tell what that looks like low single.
Matthew Boss: Did your mid single digit, but certainly probably a little bit a bias to the upside from the market.
Matthew Boss: Certainly when you look at retail being about 50% of replacement level.
Matthew Boss: Which continues to be at and then you add into a positive pipeline dynamics are we in most scenarios even in a flat retail market next year, we would assume that wholesale would be up for us in both boats and engines and again, how much up will depend on.
Matthew Boss: Where it lands at the end of this year and what you think retail does but we still think wholesale would be would be up.
Matthew Boss: And then lastly, I'd say, there's a few things that Brunswick, just as unique gone we have market share gains with mercury with new products on the horizon.
Matthew Boss: <unk> stable growth on engine P&A I don't think we talk about it enough or give it enough credit.
Matthew Boss: A business that had 26% operating margins in the quarter a record high and continues to drive recurring aftermarket earnings and revenue for us that will continue to drive stability next year significant new products, you've heard from Dave on things that are just coming out over the next handful of months and that will continue into next year.
Matthew Boss: I think we've taken a $100 million of Opex out from our original budget this year.
Matthew Boss: And we're down 50 million year to date, and that's including absorbing about $20 million of acquisition impact.
Matthew Boss: We'll be able to keep a portion of that out obviously, some things will come back and including reset of comp.
Matthew Boss: A tariff environment, and maybe a little worse, but on balance still good from a cost perspective, and then we continue to drive cash I think a lot of the things we're doing here in the back half of 'twenty four will give us cash benefits. This year, but also cash benefits next year.
Matthew Boss: Which would be helpful. Certainly in whatever environment, where that's thrown at us. So on balance I do think there is more reasons to think that 2025 as a growth year for us on Etfs.
Matthew Boss: I think it would be second half based into the second half loaded as comps get a little easier and the economics.
Matthew Boss: It helps the consumers seem to be better, but that's still our heads at the 2020 fives are broke gear off of 'twenty four.
Speaker Change: Great and then maybe Brian just a follow up so on a flat retail sales backdrop for 25, how are you thinking about pricing and promotional landscape and any change to 20% incremental margins as we think about the front half versus the back half loading.
Speaker Change: Yeah, Matt I would say that your Incrementals are your leverage will be better in the second half certainly just just the way that the calendar is Asian of earnings would likely go versus 2023.
Speaker Change: But from a pricing standpoint, we are still planning very modest pricing increases across our portfolio that that would be the third year in a row that we've done very modest increases both boats and.
Speaker Change: And engines and the price to our end consumer continues to be helped by elevated discount levels as well. So you can have a lot of places where the price of the consumer's paying for the same product is actually equal to or even less than.
Speaker Change: What it would have been or what it was 12 months ago because of discounting. So we will take a little bit of price of wholesale but it will be very very modest.
Speaker Change: Great Best of luck.
Speaker Change: Our next question is from James Hardiman with Citi. Please proceed.
Speaker Change: Hey, good morning, guys.
Speaker Change: So great.
Speaker Change: Great line of questioning there and I think some great answers I wanted to dig in a little bit more.
James Hardiman: On the inventory piece, so it seems like retail.
James Hardiman: Playing out largely as you anticipated 90 days or so ago.
James Hardiman: And yet we've got a pretty steep cut to the fourth quarter. So should.
James Hardiman: Should we interpret that as.
James Hardiman: You expect to finish the year, even lower on inventories.
James Hardiman: Previously did I I think there was some discussion about 1500 unit reduction.
James Hardiman: For the year is.
James Hardiman: Where does that number stand today and I think the answer to this is yes based on what you've said in the previous.
James Hardiman: Response, but one to one wholesale to retail it is the general sort of assumption for next year as we sit here today.
Speaker Change: Yeah. James is right I think that's a good assumption to start the start the year you are correct on your global boats being.
Speaker Change: Wholesale exceeding retail by about 500 units to about 1000 in the U S. So pipelines are we will continue to take boats and engines out of the pipeline are you you're you're going to see.
Speaker Change: Youre going to see wholesale trailing retail down about 20000 units on the engine side in the U S. Just as a as another number.
Speaker Change: So I don't think there's been any change really in our view on pipelines, except to make sure that we're balancing with the retail environment. That's Uh huh, that's shaping up as we anticipate that the real change as Dave said I think the last quarter is going to be just very cautious in terms of.
Speaker Change: Orders from our from our channel partners across the entire private display. We're just seeing cautiousness, because we have the ability to get them product quickly, we can get folks product here in the beginning of the retail season. They have a boat shows end up outperforming a maybe an.
Speaker Change: Initial expectations, we can get boats out quickly in the beginning of the year. So all of that is.
Speaker Change: It is leading to just cautiousness in the in our channel and we'll be ready to supply product once the orders come in.
Understood and then to the question on 2025, it sounds like Youre confident that.
Speaker Change: But you'll be up next year on.
Speaker Change: On an earnings basis, I think you were pretty confident about that.
Speaker Change: Three months ago now.
Speaker Change: Now 24 has come down call. It 75 cents and so I guess I'm trying to think through should should we be lowering is the view on 2025 today any lower than it was three months ago or how should how should we think about that in light of the cut to 'twenty four.
Speaker Change: That impact one five in any meaningful way.
Speaker Change: Yeah, I think one way to think about it is that in the end retail is what matters. The wholesale is the dynamics issue.
Speaker Change: Year over year, how do we build pipeline, how we complete pipeline all of those things.
Speaker Change: Retail in the end is what matters and what what.
Speaker Change: You know I think to some extent you could say that.
Speaker Change: If we.
Speaker Change: Hmm.
Speaker Change: If we get out of this situation of promoting.
Speaker Change: Products to get to get the sales in and hopefully we'll pick up some sales early next year that might have occurred in this year.
Speaker Change: Which will help the year over year of beds, but I would anchor back to what retail is in the end I think we have.
Speaker Change: Decent expectation that retail will be flat.
Speaker Change: The pipeline's really are incredibly low at the moment, and it's been going down and down and down and we've been fighting probably more with suddenly a bit with the retail dynamic, but probably a bit more with the wholesale dynamic than we have with retail so as long as retail holds then I think there's every reason to believe that the balance of <unk>.
Speaker Change: Ability is that we will they'll be constructive for EPS.
Speaker Change: Got it thank you very much.
Speaker Change: Yeah.
Speaker Change: Our next question is from Megan Alexander with Morgan Stanley. Please proceed.
Megan Alexander: Hi, good morning, Thanks for taking our question.
Megan Alexander: Maybe just to follow up on James's question. There just to clarify are you still expecting global weeks on hand to finish this year.
Megan Alexander: I think around 40, which is where you were thinking last quarter and maybe you can tell us where that is today.
Megan Alexander: And that's the.
The quarter I think it's 32 weeks.
Megan Alexander: We came out of the quarter.
Speaker Change: Yes, 32 in the U S. Very soon in the U S will probably end up in that well end up in the high Thirty's by the end of the year I think you know the exact weeks on hand is getting a bit more difficult to predict because the the unit implications of one week on hand does now like two or 300 units.
Megan Alexander: No.
Megan Alexander: I would just say that it remains in the high high studies in the U S and probably pipelines are always a little bit higher than the euro.
Megan Alexander: Europe, particularly in some other regions. So we will probably end up in the Fortyish range globally yeah.
Speaker Change: Right. So just to clarify that hasn't really changed your thinking around pipelines.
Megan Alexander: And weeks on hand hasn't really changed since last quarter.
Speaker Change: No I think that's correct I think that where we continue to be.
Speaker Change: Focused on setting up for 2025, and we'll make sure that we continue to monitor.
Speaker Change:
Speaker Change: Obviously our.
We're trying to derisk the rest of the year and in every way that we possibly can and if.
Speaker Change: If retail I mean, what we're essentially.
Speaker Change: You know probably 90.
Speaker Change: Yes, we said through the retail probably 95 more than 95% through retail probably close through retail.
Speaker Change: So yeah retail impacts are going to be pretty modest from now on so we'll just continue to modulate production.
Speaker Change: Maybe one point would be.
Speaker Change: We talk about weeks on hand, which is a kind of global numbers.
Speaker Change: It's not as though inventory is kind of from our genus and fungible It isn't we.
Speaker Change: Is still historically low long into.
Speaker Change: Inventory levels for premium product.
Speaker Change: There is still some room to go with building premium products up to a level that we'd be probably more comfortable with as we go into 2025, but for a value and kind of core product I think we are where we want to be.
Speaker Change: Got it and maybe I know this question's been asked in the past and maybe you can just help me understand a little bit more of if if you're ending high thirties.
Speaker Change: That's maybe where it used to be and not any worse. So in order for wholesale.
Speaker Change: Retail next year that that seems to imply that a weeks on hand are calling up sell or would go a lot they like or am I thinking about that the wrong way can you kind of just help square you know why you think that there could be the potential to ship ahead of retail in 2025.
Speaker Change: Yeah, we I mean, we produced I mean retail to be down about 10%.
Speaker Change: This year, our wholesale is down 25% to 30% production is down about 30% wholesale is down about 25%.
Speaker Change: So.
Speaker Change: Yep.
Speaker Change: Retail next year will need to reaccelerate. So the wholesale would be for example at the down 10% level I mean knocked down next year, but basically equal to retail would require a reacceleration of wholesale.
Speaker Change:
Speaker Change: And we're down so when we continue to manage down I think we have about 13000 units in the pipeline at the end of this year versus closer to 14000 last year. So we have some production catch up to do in some inventory catch up to do just to be very clear Megan.
Speaker Change: The comment was that next year wholesale and 25 could be ahead of wholesale in 'twenty four not that wholesale and 25 would be above retail and 25 that.
Speaker Change: That would be unlikely I think the main point as Dave said, its wholesale trails retail by a significant amount this year and if we go one in one out next year for making retail equal wholesale that would mean wholesale gains. So just want to be very clear, we would not anticipate weeks on hand increased.
Speaker Change: Next year, yeah, Okay that makes that's that's helpful and makes a lot of them. Thank you.
Speaker Change: Our next question is from Fred Leighton.
Speaker Change: Men with Wolfe Research. Please proceed.
Fred Leighton: Hey, guys I just wanted to touch on them Mercury share gains I think you said that you gained 400 basis points in the quarter I'm wondering if there's anything one time in there to call out or.
Speaker Change: Or.
Speaker Change: No.
Speaker Change: Yeah, I would say you know it was a good quarter for us, but I would say the 130 basis points year to date is the thing to focus on really you know we mentioned that in this environment.
Speaker Change: There are a lot of unusual dynamics.
Speaker Change: OEM production.
Speaker Change: Modulates two to protect inventory and other things in the balance of the year. So obviously, it's a really exciting when we see numbers like 400 basis points and we have a great product line.
Speaker Change: Especially since you know our competitors have launched some product in the last euros. So its nice to see us continuing to do well on share we expect to continue to do well in share at the upcoming Fort Lauderdale boat show, but I would probably anchor but more on the 130 basis points year to date.
Speaker Change: Okay, that's fair and I'm shifting to an avocado Ryan I think you said that you're expecting that to be up year over year in the fourth quarter and I know that there's been some timing shifts just from a retailer aftermarket perspective with the holiday but.
Speaker Change: Do you think that that's a big inflection do we feel like things are sort of stabilized or bottomed out there and should we be positioned for growth into the future as well or is that not the right way to think about it.
Speaker Change: No I think that's fair and and Fred I don't think it's a huge inflection I mean d'amico has showed some stability across the board you saw some really actually pretty stable aftermarket sales in Q3, the OEM side, both marine and RV does continue to be down, which it shouldn't be surprising giving.
Given the OEM sluggishness around the rest of the portfolio.
Speaker Change: But Q4 and it has the opportunity to be kind of marginally up in sales and delivering better better earnings and better margin I think the new products are really what drives the NAPCO success from here on out it's not.
Speaker Change: Could it be overnight its not going to be immediate but the additional new products that continue to come out certainly I had a black Friday, which four NAMIC there will be an important kind.
Speaker Change: A milestone at.
Speaker Change: It does give us some some confidence in the in the fourth quarter, but I wouldn't expect a huge inflection, but certainly stability.
Speaker Change: Quarter over quarter growth on topline and earnings and margin from third quarter to fourth quarter would be fair to expect.
Speaker Change: And then from a year over year comparison, you know probably a little bit of the same although the fourth quarter last year is obviously, a tougher comparison in the third quarter of this year.
Speaker Change: Fair enough. Thank you.
Speaker Change: Our next question is from crank, Craig Kensington with Baird. Please proceed.
Craig Kensington: Hey, good morning, Thanks for taking my question, Dave You mentioned a survey that you conducted with a boat consumers I'm just wondering if you could shed some.
Craig Kensington: Right on any more details about purchase intent and I'm curious how predictive.
That survey has been in the past.
Dave Foulkes: Yeah, Hi, Greg Yeah, we do monthly surveys of.
Speaker Change: Around about 400 boxes, and pending boaters and we understand what the demographics are so we try and look at.
Dave Foulkes: The patterns of behavior.
Dave Foulkes: Behavior, we asked them a number of questions about what's influencing that behavior.
Dave Foulkes: And this time I think.
Dave Foulkes: We saw.
Dave Foulkes: Kind of core and value boats is purchase intent remains stable, but higher household income.
Dave Foulkes: Go up I don't offhand, they have exactly the kind of percentages.
Dave Foulkes: With me I I would say that.
Dave Foulkes:
There's clearly going to be some element of latent demand building at the moment, but people. It's just on the fence.
Dave Foulkes: This year.
Dave Foulkes: Contemplating higher interest rates [noise] contemplating uncertainty and the trajectory of the interest rates contemplating.
Dave Foulkes: The election outcomes and other things so I do think once we get on the other side of that we will see some.
Latent demand that I would expect that to come through first in the more premium.
Dave Foulkes: Segments, which is essentially what we.
Dave Foulkes: What we're beginning to see so possibly.
Dave Foulkes: The the more positive sentiment was driven by the third quarter interest rate cuts.
Dave Foulkes: Those the 50 basis point cut that's translated to about 100 basis points of cuts in both financing rates. So.
Dave Foulkes: Loans over $100000 now down to about.
Dave Foulkes: About 700 about 7.5% they were in the $8 five.
Dave Foulkes: 9% range previously so we have seen.
Dave Foulkes: Good things generally happening in terms of financing costs and then obviously there are additional promotions available. So we are.
Dave Foulkes: Excited about Fort Lauderdale, coming up that's a premium show and it'll be good to see.
Dave Foulkes: You know how consumers behave at that show.
Speaker Change: Thanks, Dave.
Dave Foulkes: Thanks, Greg.
Speaker Change: Our next question is from Mike Swartz with Careless Securities. Please proceed.
Mike Swartz: Hey, guys good morning.
Mike Swartz: Maybe just first question and I think you've talked about this a number of times that the engine parts and accessories business. The big the big step up in operating margin in the quarter I think you called out it's the highest quarterly margin in company history.
Speaker Change: Can you just give us a sense of I guess, how much of that is sustainable I know theres a lot of seasonality here. So I don't I don't expect 25% to 26% margins every quarter, but just give us a sense of like how much of that is sustainable structural versus maybe some theres some inter quarter onetime ish type things that you saw.
Speaker Change: Yeah, Mike I'll take this one yeah, I mean, obviously great quarter.
Speaker Change: Just highlighting the stability here of this business I do think this is a business that's marched right up to 20% operating margins for the full year.
Speaker Change: Obviously you know.
Speaker Change: That's a that's a pretty good milestone a lot of it just depends on mix within the distribution versus product side. Obviously the products are part of the business or some really strong gross and operating margins.
Speaker Change: And distribution.
Speaker Change: Although it's it's.
Speaker Change: Pretty strong third party distribution business. It is still a third party. So it's a sell through business.
Speaker Change: Where margins are lower so you know a lot of the quarterly dynamics depends on.
Speaker Change: Where do you stand from a from a distribution versus product mix standpoint, I will say the one thing that's really shown through is the transition of Brownsberg, Indiana is complete and we are now getting more product out quicker at a better cost in all three of those things are bad.
Speaker Change: Just on the margins right more product out quicker and being able to go around the world are solely to our international customers. So.
Speaker Change: You know yeah, I, it's fair to say, you're not going to see 26% of every every corner, but certainly where there is value.
Speaker Change: We now know that we can get the product out at the right cost and get it out quickly so that our channel partners have what they need. So you should anticipate continued margin stability and growth there as we go into 'twenty five and we've taken quite a bit of cost out of that business, it's very efficient I would say that the.
Speaker Change: You know maybe the the the.
Speaker Change: The weather in the in the late <unk>.
Speaker Change: Paul has been pretty nice Oh actually.
Speaker Change: Even in October we're seeing some.
Speaker Change: Really good boating activity, so that's possibly a a.
Speaker Change: Part of a boost as well.
Speaker Change: Okay great.
Speaker Change: And just following up on that I think Brian you had mentioned before you've taken out about 100 million costs.
From the business this year.
Speaker Change: How much of that should should we expect to come back in let's say a flattish retail environment.
Speaker Change: Yeah, and $100 million versus our initial budget right. So that the number to think about from 'twenty to 'twenty three is more like.
Speaker Change: <unk> 50, or so but again, that's absorbing 20 of Opex from flight and our freedom boat club deals that were completed in 'twenty three and we have the cost in 'twenty four.
I I would think that you could keep $30 million to $40 million of the Opex as you.
Speaker Change: Days out until further notice now these are things that we would like but a lot of them are things, we'd like to add back in overtime, it's things that make the businesses run better whether its I T or sales and marketing support. So so it's not like we'd like it out forever, but certainly as you look at early 'twenty.
Speaker Change: And really twenty-five in general $30 million to $40 million of that can stay out until the market picks back up and we're able to generate more sales and cover those costs.
Speaker Change: Okay, great. Thank you.
Speaker Change: Our next question is from Jane <unk> with BNP Paribas. Please proceed.
Speaker Change: Hi, guys. Thanks for the question I wanted to ask on the <unk> propulsion margins it seems like in part B.
Speaker Change: Pretty low relative.
Speaker Change: Relative to the historical I'm, just curious on what kind of driving that step down in propulsion margin next quarter.
Speaker Change: Think about I guess, the bounce back next year.
Speaker Change: Oh.
Speaker Change: Yeah, I think you know volume volumes will be down like 25% year over year.
Speaker Change: So absorption.
Speaker Change: It's going to be a big component of of margins there.
Speaker Change: I would say that mix is generally staying at holding in pretty well. So probably absorption is the biggest component of it definitely is in and we were still.
Speaker Change: Filling pipelines of 175 to 300 horsepower in Q4 of last year were more you know we're you know one in one out with retail this year. So that's a that's the other main driver, but you know production production in finding like rightfully is down significantly in the fourth quarter, because we want to protect.
Speaker Change: Inventory levels would be ready for 25 and that does carry with it a negative absorption that's hard to hard to overcome and you don't have the volume.
Speaker Change: You know on a more positive note the.
Speaker Change: Can't take.
Speaker Change: Head count out.
Speaker Change: Exactly when you want to take it out it takes a little bit of time, so some of the headwinds here on trailing headwinds that won't.
Speaker Change: Recur in the first quarter of next year for example, when the head count will be out so that's a little bit of a transition elements in here that that makes absorption incrementally worse.
Speaker Change: That it might've been has everything been kind of instantaneously corrected for low volume.
Speaker Change: Okay got it and then on Europe, I think you mentioned weeks on hand are bit higher internationally, you saw a bit of a weakening there.
Speaker Change: Any kind of thoughts on where you would like to take I guess.
Speaker Change: National pipeline and do we need to kind of destock further into next year.
Speaker Change: So international is always a little bit higher than we are doing exactly the same thing for Europe that we're doing over here in terms of controlling <unk>.
Speaker Change: Pipeline to the.
Speaker Change: Overall.
Speaker Change: Right levels.
Speaker Change: If you think about the I mean in Europe.
Speaker Change: In the U S. We produce a lot of our product close to where we sell it.
Speaker Change: In Europe, that's not quite.
Speaker Change: So its the case. So we have we just have a lot more inventory around just for transit and other things.
Speaker Change: So we're.
Speaker Change: We're not in an unusual situation on pipelines, but continuing to take the right level of action.
Speaker Change: Okay. Thanks.
Speaker Change: Our next question is from Joe <unk> with Raymond James. Please proceed.
Speaker Change: Hey, guys. Good morning, just want to go back to inventory for a second I think you mentioned you're at 32 weeks here in the U S.
Speaker Change: And year and Youre expecting to be high Thirty's. I think you were at 37 last year. If you look at other industries, whether it's rvs or power sports they all seem to be moving toward them and we'll pay more.
Speaker Change: Tori model and holding less weeks on hand are you.
Speaker Change: Any pushback from your dealer partners that that's the case.
Speaker Change: I think we we collaborate Joe without dealer partners in assessing inventory levels I think.
Speaker Change: What is essentially happening is because the market is.
Speaker Change: So low at the moment there are other considerations in terms of inventory quantities that might be present at a much higher market level.
Speaker Change: A much higher market level, we might look just globally at weeks on hand, or at least certainly by segment weeks on hand.
Speaker Change: But if you know if you think about the level of inventory at around 13000 units. It is low on an absolute basis, its low which means that other considerations like how many boats we have put dealer.
Speaker Change: Become much more important there's a certain threshold.
Speaker Change: No.
Speaker Change: We have probably more than a thousand dealer locations.
Speaker Change: In the U S. So if they all up 10 boats.
Speaker Change: Ben It's 10000 boats and we want them to have a good representation of our product lines. Many of them carry multiple product lines. So as inventory levels become lower I would say they are not going to continue to fall.
Speaker Change: You know as fast as they might otherwise in terms of efficiency.
Speaker Change: I don't you know maybe there are other factors of play in other industries, but for.
Speaker Change: Hum.
Speaker Change: Our dealers are in a lot of cases are specifying option contents and colors and stuff on inventory. So we need to align them with a specific dealer orders so I am not anticipating.
Speaker Change: As we saw in Covid web what dealers are selling production slots versus.
Speaker Change: Versus product on the ground, but we're going to see.
Speaker Change: You know a statistically significant change in.
Speaker Change: Long term weeks on hand.
Speaker Change: Okay, That's California, just kind of a follow up on that can you speak to that.
Speaker Change: You can that you need to pull back on promotions in Q4, I think you wanted to avoid what you called excessive wholesale pull forward. What are you seeing an indication that dealers were actually looking to take orders up in Q4.
Speaker Change: No I don't think we particularly were but.
Speaker Change: Essentially a couple of things to think about it I mean, I I draw the I'd, rather be selling dealers boats when there's pull for them.
Speaker Change: This is pushing them dealers and I think.
Speaker Change: As soon as dealers feel they don't have enough inventory there'll be plenty of pulp.
Speaker Change: And then the other thing is we don't want to get into the situation have learned behaviors, where dealers just waiting for the next promotion whatever it is.
Speaker Change: Do orders, we we have to kind of break that habit and now's a good time to do it I think.
Speaker Change: Okay got it thank you.
Speaker Change: At this time I would like to turn the call back over to Dave for some concluding remarks.
Dave Foulkes: Well. Thank you all very much for your questions. There really appreciates it I think given the market conditions I think we've used.
Dave Foulkes: Controllable levers to come close to maximizing the potential of our business in Q3 and 2024.
Dave Foulkes: And also position us very well in terms of inventory levels in a very fresh product line for 2025.
Dave Foulkes: Obviously hurricane saline and Milton where additional once a headwind in the quarter, but the direct impacts to our business were relatively minor we do hope that the individuals and families and businesses that were most severely impacted by those hurricanes.
Dave Foulkes: Quickly.
Dave Foulkes: As you will have seen in the quarter, we executed a sequence of senior leadership changes with the intention of broadening the experience of our most senior leaders and also accelerating some aspects of the Novocure group strategy.
Dave Foulkes: I'm, so pleased to get that done in the new leaders are settling in extremely well with a lot of enthusiasm. So I'm very excited about that we're also very much looking forward to attending the Fort Lauderdale show next week.
Dave Foulkes: As I said, we will debut a big range of exciting new products from a number of our brands. So we keep investing in those products that sets up for 2025.
Dave Foulkes: Thank you very much.
Speaker Change: Thank you. This will conclude today's conference you may disconnect. Your lines at this time and thank you for you if I can for patients.
Speaker Change: [music].
Speaker Change: Yes.
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