Q2 2019 Earnings Call
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Oh, Thank you for calling May have the conference I'd piece.
Brunswick Q2.
Okay.
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A F.A. Andy.
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Welcome.
We announced regarding the structural reduction of approximately 50 million.
Annual run rate cost across the enterprise.
Enables us to substantially enhance our long term earnings power under a range of potential market scenarios.
The demand environment in the first half of 2019 was challenging in certain of our businesses.
Q in significant part to unfavorable weather across many regions of the U.S and Canada.
Muted market demand affected both of our segments, mostly through reduced demand for value boats and lower horsepower engines.
However, we were able to post strong earnings growth in the quarter due to power products contributions. The overall strength of our premium brands cost management actions and stable PNM business performance.
We also completed the sale of the fitness business in the quarter and plan to aggressively deploy proceeds in a manner that enhances shareholder value, which I will discuss in a few minutes.
Ill now provide some commentary on our segments and the overall marine market.
For the Marine engine segment revenue growth was 4.5% in the quarter with outstanding operating leverage of 56%.
Leading to a 160 basis point improvement in operating margin.
Demand for high horsepower outboard engines remains particularly strong, especially in the 175 to 300 horsepower.
Vsix and V.A. categories introduced in 2018.
Sales of high horsepower engines to the dealer channel up significantly over first half 2018, resulting in more robust repower activity.
Capacity investments to further our production capabilities in this horsepower family remain on target for completion in the fourth quarter.
With a new state of the art die cast facility opening in this quarter as part of these investments.
We also launched a 450 horsepower racing outboard in the quarter following closely from the mainline 400 horsepower engine launched in February .
These platforms are the most recent evidence of the success of our strategic investments in industry, leading technology and product development capability.
Which has driven both market share gains and margin accretion.
The parts and accessories business continued its steady performance led by power products.
With the substantial aftermarket portion of the business, which comprises 75% of total PNM sales outperforming sales to Oems.
The bulk business continues to focus on growing its premium boat brands, which significantly contribute to the sales and earnings performance for the segment.
Boston Whaler and Harris in particular, our planning major product launches during the balance of this year and early next year as we maintain investment levels needed to drive future growth.
For the second quarter, the boat segment's revenue and earnings are modestly down, but operating margins remained relatively stable as the business counted softer market conditions and elevated discount levels with focused cost containment.
Finally, as most of you already know we completed the purchase of Freedom book Club in May making us the leader in shared access boating.
The business is performing to plan and we look forward to working with the freedom team capitalizing on the many synergies with our other businesses and continuing to grow this fantastic business.
Next I would like to review the year to date sales performance of our segments by region on a constant currency basis, excluding acquisitions.
In the U.S. total revenues were up 1% while international sales in total were up 5%.
International sales for the engine segment were up 10% with gains in all regions, reflecting the performance of the outboard and parts and accessories business lines.
Boat segment into international sales were down 6% as expected demand in Europe was lower due to slower market conditions and the supply constraint caused by the transition from a contract manufacturing relationship that we noted in January .
Canadian boat revenue was also lower in the first half, reflecting the impact of both import tariffs and unseasonable weather on dealer purchasing behavior.
As a reminder, the import tariffs, which will put in place in Q3 last year were removed in Q2 this year.
Which should benefit comparisons in the second half of 2019.
This table provide some color on the performance of the U.S. Marine market.
And MME outboard engine unit registrations were up modestly year to date.
With outboards below a 150 horsepower down, 7% and outboards 150 and above up double digits.
First half ESI data for the U.S. boat market is down 7%.
And on a trailing 12 month basis is down 2%.
As I mentioned earlier this is due mostly to weakness in the value end of the aluminum efficient pontoon categories.
The market on a dollar basis continues to outperform unit comparisons due to strength in premium categories and continued transition to higher horsepower engines.
Overall, despite the slower market conditions consumer health and general economic indicators remain fairly positive, giving us confidence that the retail market trends will likely stabilize as we get into the back half of 2019 and into 2020.
Finally, as long anticipated we closed on the sale of the fitness business at the end of the second quarter.
With net proceeds of approximately $470 million from the sale.
We have an aggressive plan in place to deploy the proceeds and have already taken certain steps to accelerate our planned actions.
Our board has increased our share repurchase authorization to $600 million.
And we plan to repurchase 330 million of shares during the second half of the year.
The increased authorization also gives us flexibility to continue on an aggressive repurchase schedule beyond this year as market conditions allow.
Note that we have already repurchased 70 million of shares since the first quarter earnings call, bringing the total planned repurchases for the year to 400 million or approximately 10% of our outstanding shares.
When combined with the recently completed acquisition of Freedom Book Club. These actions fully invest the fitness sale proceeds.
In July we completed two actions to strengthen our balance sheet that were included as part of our normal capital strategy plans for the year.
First we called out $150 million of outstanding Senior notes, which will be redeemed on August the second.
Additionally, we completed the annuity placement for our legacy pension plans finalizing the exit from our remaining defined benefit plans.
Now I'll turn the call over to Bill for additional comments on our financial performance.
Thanks, Dave.
On an as adjusted basis diluted EPS for the quarter was $1.45, a 9% increase versus the second quarter of 2018.
Sales were up 3%, but down 3% without the benefit of power products.
Operating earnings improved by 15%.
Which translated into an operating margin improvement of 160 basis points and impressive leverage of 65%.
On a year to date basis.
Net sales are up 6% versus 2018 and flat without the benefit of acquisitions.
Operating earnings have increased by 16% with strong margin growth of 120 basis points.
In the Marine engine segment revenue grew 4% led by power products and continued robust demand for higher horsepower outboard engines.
On an organic basis sales were down 4%, primarily resulting from decreased sales of outboard engines, 150 horsepower and below and Sterndrive engines.
These declines are due to unanticipated OEM production cuts with weather impacting demand, especially in the freshwater market in the northern us in Canada, where mercury has an over indexed share position.
The performance of the power products are the parts and accessories business continues to be enhanced by the addition of power products.
Note that the aftermarket portions of the Mercury business, including associated PNM products and distribution businesses.
Remained relatively flat despite the challenging first half market.
Sales to Oems were softer, but still outpaced industry performance.
Mercury's adjusted operating earnings increased 14% in the quarter due mostly to power products.
In addition, favorable impacts from changes in sales mix and cost control measures more than offset the impact of tariffs and unfavorable changes in foreign exchange rates.
This performance resulted in a 160 basis point increase in adjusted operating margins and operating leverage of 56%.
In the boat segment adjusted revenue decreased by 2%, which excludes the impact of the sport yacht and yacht business exited last year.
By category aluminum freshwater sales were down as declines in value fission pontoon sales offset increased sales at laronde.
Recreational fiberglass was flat for the quarter with improved mix towards larger product leading to gains at sea Ray.
Salt water fishing sales were slightly down as the overall industry category has leveled off after several years of strong growth.
Overall average selling prices increased reflecting expanded content on boats, along with inflationary price increases.
Adjusted operating margins were relatively stable as benefits from cost control measures offset the impact of lower volume and higher retail discounts required a lower pipelines in the second half the year.
Dealer pipelines ended the quarter with 35 weeks of boats on hand measured on a trailing 12 month basis, which is up five weeks from last year.
However, on a unit basis field inventories up only 6% versus the end of the first half of 2018.
It is important to note that a substantial portion of the increase is comprised of aluminum fission pontoons, where market demand has most trailed expectations.
As we discuss every quarter, we pay very close attention to pipelines.
Attempting to match, our wholesale shipments to expected retail performance.
The weeks on hand metrics and influenced by the past 12 months of activity.
And is reflecting the slower retail trends over that period.
Wholesale units sold in the second quarter were down 9% versus Q2 of 2018.
With a 7% decrease year to date.
In spite of our attempts in recent quarters to respond to market demand greater wholesale reductions are necessary in the second half to normalize pipelines.
As a result, we are planning to significantly lower wholesale shipments in the second half, which is necessary to realign pipelines with demand.
Resulting in overall levels at year end that are meaningfully down in overall units versus 2018 and consistent on a weeks on hand basis, providing a solid base entering 2020.
Our second quarter continuing operations GAAP results also reflect the impact of certain items, which have been excluded from our as adjusted results.
We recorded restructuring exit impairment and other charges in the quarter totaling $5.9 million, primarily related to cost actions taken across the enterprise.
In addition, we incurred $7.3 million of purchase accounting amortization.
In connection with a power products in Freedom boat club acquisitions.
And $2.9 million of charges related to product warranty and discounts related to legacy sport yacht and yacht products.
We are revising our guidance for the full year adjusted diluted EPS, which is now in the range of $4 and 20 to $4.30 per share.
This incorporates lower sales volumes in the back half of the year, including pipeline rebalancing efforts, which are offsetting benefits from cost reduction activities and share repurchases.
We anticipate revenue to be up slightly versus 2018, and operating earnings growth of low to mid single digit percent due to solid improvement in gross and operating margins.
For the third quarter, we anticipate revenue and operating earnings to be down mid single mid to high single digit percent EPS in the range of 95 cents to one dollar two cents per share.
Moving to tariffs, we anticipated net impact to 2018 pre tax earnings of $17 million to $22 million.
Which is an increase from the levels discussed on the first quarter call solely related to the wave three of China tears, increasing from 10% to 25% in early may.
We continue to work with our supply base to minimize the impact of these tariffs with our ability to reduce supply costs or increase affected and product pricing in line with our overall tariff impact assumptions.
On the boat side, the retaliatory tariffs on boat exports to Canada were lifted in the quarter as Dave mentioned earlier. This should have a favorable impact on comparisons in the second half of the year.
The impact of retaliatory tariffs on boat exports to the EU remains unchanged and incorporated into our plan.
I will conclude with an update on certain items that will impact our PML and cash flow for 2019.
We anticipate free cash flow in 2018 in excess of $260 million down from the initial projections.
Due primarily to lower anticipated earnings for the year and slightly higher working capital usage.
Our cash flow generation still allows ample capacity to continue funding future investments and growth, including acquisitions and successfully implementing our capital strategy.
We estimate that the effective book tax rate for 2018 will approximate 22%.
Which is slightly lower than our initial assumption for the year.
And finally as a result of planned share repurchase activity, we anticipate average diluted shares outstanding to be approximately 85, and a half million a 3% reduction versus our previous estimate of $88 million.
As Dave described earlier, we continue to execute against our revised capital strategy plan for the year, which was augmented by the fitness sale proceeds. This slide shows the updated assumptions taking into account the actions discussed.
Our capital expenditure plan remains focused on investments related to product development in our premium brands.
And capacity for higher horsepower outboard engines.
I'd also like to note that the final cash requirements associated with the pension exit were more favorable than anticipated.
I will now turn the call back to Dave to continue our outlook comments.
Thanks Bill.
As I mentioned in the opening of this call we continue to execute against our plans for the year and our overall marine strategy.
With several key factors driving our future performance.
For our Marine engine business, we anticipate net sales growth in 2019 for this segment in the low to mid single digit percent range with a solid improvement in operating margin.
Our priorities for this segment include growing market share in outboard engines, especially in the greater than 175 horsepower categories.
And completing additional capacity initiatives necessary to meet the strong market demand for these products.
The impact of additional capacity will also drive meaningful revenue and earnings growth heading into next year.
Even with the substantial product launches earlier this year, our new product pipeline remains solid as we invest in additional PNM propulsion products to further future growth.
The integration of the power products business remains on track with overall performance in line with expectations.
Similarly, the bulk group is that the case is executing against its operating and strategic priorities.
We anticipate modest topline a margin declines in 2019 with an enhanced focus on improved operating performance at several of the boat facilities combined with increased attention on cost reduction activities, helping offset the slow marine market conditions and lower sales from certain Boston whaler product lines and advance of impending new product launches.
More importantly, these actions will help drive margin improvement in 2020, as the full year benefits flow through the cost structure of the business.
New products will continue to take center stage, including major Boston whaler product launches starting at the Fort Lauderdale boat show.
That will refresh many mature product lines over the next year.
Harris also has upcoming new product launches with an exciting and updated premium pontoon platform being shown and upcoming dealer meetings.
Finally Freedom book Club continues to provide us with a platform to grow our leadership position in shared access boating.
And we expect freedom to open its 200 location most likely by the end of the third quarter and have just under 2500 boats throughout its global fleet.
Before I close I want to provide some thoughts on our anticipated performance for the remainder of 2019 and 2020.
While our performance. This year has been affected by a softer than expected market. Our core businesses are performing well and we continue to outperform the market in several areas, including higher horsepower outboard engines premium boat categories and PNM.
In addition, and as discussed on this call. We have taken are executing against several significant actions to enhance the earnings profile of the company moving forward.
We have completed two major portfolio enhancements selling life fitness and acquiring freedom book club and are working through a successful integration of the power products business.
We are deploying the fitness proceeds in an aggressive manner to increase shareholder returns.
Finally, we are actively managing enterprise wide costs, while still investing in new products and technology, which will enable future growth.
And exhibiting prudent pipeline management.
In short a very positive year, despite challenging market conditions.
In looking to 2020.
I would like to reaffirm our commitment to look to delivering on the 20 20-F targets that we established in Miami earlier this year.
Assuming a market flat to 2019.
Our results will benefit from a full year impacts of several of the items I've discussed at length on this call.
Even in a flat market additional growth is achievable from our formidable parts and accessories business and the absence of 2019 pipeline reductions.
Overall, we continue to proactively position the business to operate and maintain healthy levels of profitability in various market conditions, which we believe is not yet fully reflected in our valuation.
In closing, we continue to be confident in our ability to deliver against our long term strategic plan.
Despite a softer than anticipated marine market in 2019, we will leverage our strength in premium product categories in both our segments, our increased commitment to cost containment and our aggressive capital strategy plan.
To deliver what would be the 10th consecutive year of adjusted EPS growth.
We will prepare for a successful 2020 by continuing to invest in new products some of which you will see very shortly.
Ensuring healthy pipeline inventory levels and exiting this year with a healthy balance sheet.
After a pause in August the team will be hitting the road again in September and we look forward to seeing many of you.
I will now open the line for questions.
Ladies and gentlemen, if you have a question or comment at this time. Please press Star then the one key on your Touchtone telephone. If your question has been answered you wish to move yourself from the queue. Please press the pound key.
Our first question comes from Michael Swartz with Suntrust.
Hey, guys good morning.
Good morning, just wanted just a broader question on some of the engine investments you're making in new capacity.
It sounds like you are.
Based on your commentary that that will give you a tailwind going into 2020, I guess I'm just trying to understand and maybe you can help flush it out for everyone just given the softer.
Market backdrop.
Al maybe those two items for it.
Yes, Michael so you'll see us.
The majority of the softness that we've been seeing is in a value boats and.
Outboard engines below a 150 horsepower.
Which tend to be associated with those more associated any with those aluminum boat categories.
For our new engine platform.
Oneseventy five through 300, and our existing platforms in the high horsepower range, we're continuing to see.
More demand than we can satisfy and accelerated market share gains.
Obviously, we want to do.
Fully take advantage of that.
If you remember on our early earlier calls we referred to a couple of kind of multiplying factors that led to that.
Allows us to take advantage of one is that.
While we have behind supplying a full demand some of our more profitable customers.
Still without product.
And then the other thing is it leaves us we're in a great position once we get that capacity to even more aggressively go after market share gains.
We have been a little bit limits as we've been gaining market share, but still a little bit.
Held back by the fact that we we we need more product to be able to supply conquest.
Oems and and other potential customers so.
Yes that capacity is really important to us and we do expect a significant tailwind from that into 2020.
And Michael if I could just maybe add to that if you look at the international performance of Mercury in the year to date period.
As we've gotten more product position internationally, we've really seen.
Real nice pull through and sales gains.
So I think that kind of demonstrates that as we get more capacity to satisfy demand theres not only opportunities to sell stuff with the higher horsepower engine, but really across the four product family yeah absolutely.
Okay. That's great. Thank you and then just the second question I mean, given the given the state of the industry in your efforts to bring down pipeline levels I guess to.
Oh levels on a weeks on hand basis. I mean is this something that you think is kind of cleared up by calendar year end, where we can kind of hit the hit the ground running in 2020, and maybe have a little to no hangover from from the inventory clearance.
Yes, absolutely that is exactly what we're planning to do we want to go into 2020 completely clean.
We will have when we go into 2020 based on our current plan we will be.
No down.
Significant number of units versus where we were.
At the end of 20 718.
And about equal weeks on hand, so we expect to be an extremely strong position going into 2020 now from today's perspective, and what I guess, what's your expectation for retail in the back half of the year to really get there I mean, obviously that would assume some sort of stabilization I would I would assume.
It's more stable.
It's slightly improved from the trends in the first half the year and I would say that it is.
Going to be heavily influenced by the performance of retail over the next 90 days.
So as we look at what happened in July August .
In September that will be kind of a period of time, where a lot of the retail activity that needs to happen and we will be curtailing production along the way as well. So we should start to make some pretty meaningful headway on this by the end of Q3.
And then.
I have a little bit to take care of in Q4.
I think although we're you know that there's a bit of stabilization when we're not expecting the market changed significantly in the second half of the year. So that we're planning for them.
Okay, great. Thank you.
Our next question comes from Tim Conder with Wells Fargo.
Thank you.
Gentlemen, just wanted to and along the pipeline reduction.
Commentary there.
The type of deal or assistance that you've already done or programs that you put in place to clear that out here over the balance of the year any any color that you can give there and it sounds like ahead of the new product introductions with whaler.
In conjunction with the what Youve commented on the salt water slowing.
You're just going to kind of maybe dial that back a little bit collectively is that that maybe another area to not quite as bad as the aluminum vision in pontoons, what is another area, where you're we're doing a little bit of pipeline adjustments.
I would say on on wireless I think you know in our recent product launches that we launched products in white space areas. The round families. The 353 80.
Which have been very successful but.
We are now focused on deep into the process of rejuvenating some of the more mature product lines.
And I cannot tell you how excited I am about that and you'll begin to see that very soon the bolts look fantastic.
But of course, we want to make sure that as we launch those products, we launch them into as clean as possible.
Wholesale pipeline as we can and so were deliberately.
And making sure that that is the case.
So that's that's really the story around where whaler is doing extremely well and we want to make sure that those new products going into the field as quickly as we can.
Okay.
And then on the.
The programs that pipeline reduction any any programs the area. If you alluded to that in the press release a little bit.
Yes, so we have been working with our dealer partners.
You know marine Max to make sure that we are competitive in the marketplace and that is certainly.
Lets some high discounts than we've had is starting in recent years.
I would say, though that that youre seeing some of the effect of that on financial basis already in Q2.
Because of.
Financial rules.
Mean that if we anticipate.
Retail discounts needed to.
Needed to progress the pipeline.
We book them as soon as we anticipate them and so.
That is not going to be for the full weight of that isn't going to be in the back half the year, we've already taken some of that in the in the first half the year I think Tim as you think about the implications of that to the second quarter margins for boats.
Embedded in that relatively stable margins, we did take.
A fair amount of discounts through the P., an hour, which we were able to mitigate through.
Some cost reduction efforts as well as probably maybe a little bit more favorable mix, but.
In general.
I wouldn't take it read through that because we had stable margins Didnt mean, we didnt take care of it in the quarter, we actually did.
Have some meaningful discounts that we recorded in the quarter.
Okay. Okay. That's all very helpful gentlemen.
Lastly, shifting to freedom.
Boat group.
If commented that the franchise fleet generally has about a two to three years sort of replenishment cycle.
Maybe a little bit to the to the higher end of that range is there any reason to believe that that something other than a straight line type of.
Replenishment will go on here, I mean, either shortened or elongated.
As you see things now on Azure as you're getting that integrated.
Well I think a couple of really encouraging trends for freedom, we expect to.
In 200 locations by the end of the third quarter.
And the number of boats in the fleet is now close to 2500 boats.
So that is a really meaningful quantity no no particular change in our anticipation around the.
They kind of replenishment cycle, we think two to three years.
It.
I think we can offer our.
Firstly I guess if you if you think about this that we have.
Around.
20 or so.
Company operated locations, obviously will be refreshing those with Brunswick product as quickly as we possibly can.
For the balance of the franchise locations.
We believe that Brunswick can offer our franchisees extremely attractive.
Boats and engines and services, including financing extended warranties and many other things.
That will cause our franchisees just by themselves to want to.
Accelerate.
Transition to Mercury products and add to Brunswick boats.
I would tell you that the first.
Boats with Mercury's on the back of already arrived in in the franchises. So that's extremely exciting and that was actually some of the existing.
Boat Oems transitioning their transoms from competitors to Mercury to Mercury.
So that is a nice they know very very quick impact.
So I don't know if I can give you Tim a straight line versus different relationship to that I would tell you that I believe that we are doing all the right things to make that transition occur.
And we're very excited about how quickly. This this businesses is growing.
Okay, and then that should be supportive of obviously, the the overall product business and then.
Add on then to the margin detour to getting on the core freedom.
So is it correct exactly right I mean, the margin stack up in that business is really really attractive and on where we're very anxious to take full advantage of it.
Thank you. Our next question comes from David Macgregor with Longbow Research.
Yes, good morning.
Just looking at the international business Awfully Big difference in the experience with growth in engines versus boats engines up nine boats down 17, I'm guessing some of that success with the new engine product platform, but can you just talk about the disparity there between the engine experience to the board experience.
Yes, I think the most discrete difference is really that.
The issue that we mentioned earlier in the year, we had a.
Disruption to supply in now.
Contract manufacturing arrangement of four boats, which while were working our way through right now.
But which had a disproportionate effect on the difference between our boat and engine sales. We have extremely competitive boats that are designed for the European market. We also have both that are produced locally in Europe like Sea rays and Bay line as they are also very competitive. So we are working hard right now to.
To address that issue with European boat manufacturing.
One difference between.
Between the way that.
Boats and engines sold in Europe versus the US is that boats tend to be shipped with no engines on them and then the engine and gets married up at the dealership.
What that means is if our engine if our boats supply.
Is disrupted there is no disruption to engine supply.
So thats just the difference between the way that it works I would tell you that all of this is an extremely small impact on our earnings but something that we are working to address.
Okay. Thanks for that and then just a follow up can you just talk about the Mercruiser I guess, given the weakness in stern drive.
It continues to be a drag can you quantify the extent to which it was a drag.
But I think if you.
A couple of very positive things about us Stern drive business.
We took the decision as you know several years ago.
Two.
Rationalize our Sterndrive product line up and.
Essentially take control of the design.
And the manufacture of those engines and so we are not incurring any costs right now too.
Upgrade those engines or change the engines or drives that that are due to reasons outside our control.
So we were able to modulate that business extremely effectively and minimize any costs.
I would say that.
Yeah, you know the the price the primary beneficiary of that transition from Stern drive is ours.
We have put in place a an incredible outboard lineup.
And it's being very effective both in Conquesting.
Oems and general market share, but it's also a very effective lineup in the same horsepower categories as sterndrive. So we do see this rebalancing.
And.
There are some categories are sterndrive boats that are.
Our holding up pretty well, particularly large a day boats in the lakes.
But but that you know that transition continues to occur and we are in a great position to be able to.
Kind of modulate them.
Thank you. Our next question comes from Craig Kennison with Robert W. Baird.
Good morning, Thanks for taking my questions I wanted to start with the consumer and really get your read of the U.S. consumer clearly weather was a factor this quarter no doubt about it but.
Is there something else going on with that consumer that.
Gives you pause.
But I think if you we look at so we go to dealers we look at dealer.
Surveys and sentiment I think weather is remains the predominant factor that our dealer partners call out as.
I was being something that's affected.
A boat sales in this year.
So I.
No I think.
If there are other trends its not something that comes through strongly.
In a in our interactions with the consumer.
And then your experience when it's a weather issue.
Does that demand return later in the season or at this point you think it just is deferred into next year.
I think we'll get some of that back I don't think we'll get all that back.
So that is a you know in our plans now for the balance of the year.
We expect to see a some some modest.
Declines.
So yeah, I think I think I think we'll get some of that back, but probably not all of it.
Okay, and then a bill for you on the margin front you know the portfolio has changed a lot given all that all that you've done to get focused on marine could you give us an update on what you think of as your incremental or decremental margin in each each of your marine segments.
You know Craig I'd say, we continue to target.
At least you know if you look at the core performance.
No decline in sales, we actually saw Decrementals.
That under indexed against kind of what we would consider our target is 20%.
Right. So if you think about the benefits of the portfolio.
Changes that we've made we've seen margins hold up considerably better than I think people would have expected to.
In a softening market environment, partially due to the portfolio partially due to the fact that I think we've been extremely proactive on the cost side of the equation.
On the upside I still think 20% is our.
General target I would say boats tend to be a little bit lower than that in engines tend to be a little bit higher.
And I don't think there is a big difference between the outboard.
Engine business and the P. in a business on the upside.
But boats given the portfolio structure would tend to be a little bit lower than that.
Perfect. Thank you.
Our next question.
Comes from Steves Aecoms JP Morgan.
Great. Thanks for taking my question I wanted to dig a little bit more on the the segment topline performance.
So I'm looking at propulsion sales can you just elaborate a little bit more on your growth expectations for the second half of the year.
My math implies propulsion will be down about mid single digits on a full year basis. So what's the breakdown of performance above 150 horsepower versus allow I know you're expecting the overall propulsion category to return to growth in 2020.
Maria.
Yeah, I'd say youre.
Kind of thoughts on the propulsion side of this are.
Directionally correct on a mid single I think we're going to see.
Probably more concentrated impacts in Q3 than we are Q4.
Only because we would expect some of the.
Production cuts on the part of Oems and even our own to be more.
To more weighted towards Q3 than they will be Q4.
I'd say on the split between 150 and above and 150 and below I think most of the decrease in fact all of the decrease.
It's going to be in the categories 150 and below.
And as we get into the fourth quarter, we should start to see the 175 to 300 category pick up.
As the new capacity is brought online.
So thats one of the reasons why.
Q4 starts to look better for propulsion than Q3 does in its more.
More favorable.
I think the second part of your question. We have we still have significant backlogs on on 175 to 300 so.
Just being able to address the backlogs is going to be a great start to us, but yes, we think that.
Getting that capacity in place as a significant tailwind to as into 2020.
For the reasons that I described earlier.
We're under supplying right now given where our existing customer base.
And we have been gaining market share.
Which which we expect to fully exploit when we get that additional capacity.
Great and then just a higher level higher level question on.
The broader industry like where we sit today are you concerned that there could be some areas of weakness that may persist into 2020.
Are there any particular areas, where you're well.
And in terms of bloated inventory levels in the channel thanks very much.
Well I think we are very.
Prudently addressing.
Inventory levels, and making sure that by the end of this year. We are appropriately placed for 2020, even if the market is flat.
We'll be we'll be down significantly in units in the field by the.
By 2020, I think that what you've seen us do I think his position our business to be extremely robust.
In a wide variety of market conditions.
I think our best.
Planning for 2020 is.
Is to make sure that even in the case, where we have.
A flat market demand.
We meet our 2020.
Financial performance expectation so.
You know I don't know if I have a great way of protecting particular segment trends, but.
I would say that there's nothing.
New that is happening that we haven't already seen.
In 2019.
Thank you. Our next question comes from Scott Stember with be okay.
Hi, good afternoon guys.
Good afternoon.
You guys stop last quarter, given I guess your individual retail sales numbers, but can you just give us.
Flavor, how you guys are performing versus the market and maybe talk about a couple of categories that are key to you guys.
Well I think we will say that our premium boat brands are performing extremely well very very strongly solidly.
I would say that.
On a unit basis, we we we.
Obviously are in aluminum value, both space and that has been affected more than others.
But I think that we are still performing okay.
I think it and on the pontoon side.
New products that.
We're already beginning to launch a will improve our.
Market share in that area, but I think the thing to focus on here is in terms of impact to our financial performance.
We are heavily over indexed on the premium categories, where we're performing extremely well.
Got it and reports the obviously the weather has cleared off.
Yes, the latter part of July .
What are you seeing just are you seeing some sort of stabilization at retail.
So for the last I don't know last few weeks.
Yeah, I think July looks.
Somewhat better.
And.
It's nice to see certainly I'm sitting in Chicago here, it's awfully nice to to look outside at Soma consistent good weather.
We see more people boating, and that's very constructive for us So July looks constructive I would say.
Okay, and just lastly, just going over to 2020, you guys maintained your guidance even on the low end I guess.
Looks for.
Pretty healthy growth I know part of it is a stabilization in the business and.
Not having to deal with the inventory issues that you're dealing with right now, but how prominent the share repurchases play into your guidance I know you talked about a little bit, but but for for 2020.
Well I think Scott if you do the math, it's obviously fairly significant it's.
Kind of a total benefit 50 to 60 cents a share capital Street capital strategy right. So that's a fairly significant benefit I think when you cut through it all against the $5 to 550 targets that we had at the beginning of the year.
We've had.
We've had market.
Down this year, when we expected to be up three to five.
We're also planning next year to be flat so that.
Kind of gets us in a position where we're behind on those two factors.
Between capital strategy slash share repurchases deploying the fitness proceeds.
And then to the cost reduction efforts those those factors pretty much balance them symbols sells out against where we expected to be.
Through 2020.
Got it that's all I have thank you.
Our next question comes from Joe Altobello with Raymond James.
Hey, Thanks, guys good morning.
First question back to 2020 I think this is you guys are still looking for about $10 million to $15 million to recommend alterra.
What does that look like for next year I'm, assuming you keep the exclusions on the 45 to 65.
With power.
So it's a it's effectively Joe that we're assuming the same for next year, so no incremental incremental no incremental effect.
Okay, and if you lose that excluding what happened.
It would be probably Joe this is Ryan I would probably be in the twentyish million dollar.
Number of of expense, but again, if you've been following the news.
There's actually been a push in the Senate to put a build through that would actually extend the extensions extend the.
On the exclusions exemption. So that's something we're not we would consider that a small risk at this point.
Okay good to know.
Just secondly in terms of the cost savings you guys have announced over the last.
What this does is it fair to say that the first announcement was really rightsizing overheads.
Given the fitness sale in the second with more of a sort of a a you know a response to the market decline that we've seen of late and then the second part of that question is.
Is there more to come.
Do you have more flexibility for example, next year is not flat, but were down five again next year.
Yes, so I think.
First of all as you can imagine.
That scale of restructuring takes quite a long time to.
To plan so none of it was reactive.
I would say that as he said.
The corporate.
Enterprise can have a functional reductions were a result of us rightsizing after the fitness sale.
But I would say that.
When you're in a business that has seen.
Growth for eight consecutive years.
Youre, focusing typically on how to grow the business and not necessarily.
How to fully optimize the structure.
And as I became the CEO I wanted to make sure that we.
In light of the fact that you never know what the markets are going to do.
That we took a look at our enterprise cost structure on a very systematic basis. This is certainly not a reactionary basis.
And made sure that we were as lean and fit as we could possibly be.
As soon as possible entering the back half of 2019, and certainly 2020 and beyond so.
Hi, Yes, I think that this was a.
US taking a pause to look back at the cost structure that we've accumulated over eight years and making sure that we restructured it to be as efficient as we possibly could be.
Obviously that gives us a much more robust position given the fact that the market conditions are somewhat lesser.
And Joe if you're trying to gauge of the the 17 million of cost reductions that was attached with a first announcement.
That was DNA functions across the enterprise about half of which was corporate half of which is going to show up in the in the operating segments.
Thank you our next question.
From Eric Johnson with BMO capital markets.
Hey, good morning, So David on a scale of one to 10 with 10 being most confident how confident are you about achieving is five to 550 next year.
Is there an 11 or 12 in Netscaler.
Sure.
[laughter] I'm very confident.
Okay, Great and then how much of the cost cutting actions are realized to your 2018 guidance.
The well the effects, obviously, our own phased into the back half.
I don't know if I've got the exact number in here bill can probably pull it off.
Yes.
Sure.
So the.
So I'm going to I'm going to frame. It this way Garrett so so we've got.
For the year.
Through the cost reduction actions, we've taken and decisions we've made relative to timing of.
When were going to incur spending as well as.
Kind of the temporary.
Implications of the impact of performance on our variable compensation.
Well, we we have reduced our spending plans for the year.
For 19, well in excess of the $50 million of cost reduction.
What we've done is we've effectively put action plans in place to make those all structural going into.
Into 2020 and up to 50, we we've already acted on a very healthy portion of the 50. So it's not like we've got to execute and and.
Plan on it we've already taken considerable action that makes that 50 million permanent.
Okay, and then on propulsion.
Can you remind us what the ratio of Repower sales, our verse OEM sales and your propulsion business.
It's about 15% we have been.
Slightly under that in the new platform, because we've been I'm sorry, the new engine platform the 175 to 300.
Because of a we've been we've been able to completely satisfy all the demand.
But once we do.
That will be.
Back to 15 or above I think the new platform was designed to be much easier to use for repower purchases much less intrusive in the boat than the prior engine platform in that in that horsepower range. So.
We're probably a little bit trailing right now in the new platform, but we expect to get ahead of that when we get capacity.
Thank you. Our next question comes from Greg Badishkanian with Citi.
Great. Thanks.
I'm just wondering in terms of inventory levels.
How do you think your competitors.
At retail where inventory levels are stock today do you think there's too much inventory for for them as well.
Yes, Greg I'll take that one.
We believe and we understand from intelligence that we have.
There were probably a little bit better situated overall than the overall industry would be.
You know I think embedded in that comment is going to be you're probably going to hear some folks who might be a little bit better position, but there's going to be folks or a little worse than I'd say most of our.
Challenges rely again I'll reiterate our in the.
Lower end value end of the aluminum fission pontoon.
Categories, which we can get taken care of here in the <unk> in the second half of the year.
Mhm, so just as a follow on there, let's see inventories they may not be as well positioned as you.
Your competitors at retail or are they being more aggressive in terms of discounting and promoting too.
You know to have that sell through or.
Or is it in line with you in terms of your added that discounts and promotions to the retailers.
I think we have seen some more aggressive discount, saying I think that.
At this point in the year, we're probably.
Similar I would think we are similar.
Okay all right.
Perfect. Thank you.
Our next question comes from Eric Wold with B. Riley B. Riley.
Thanks, Good morning, guys.
A few questions going to follow up on ones that have been asked I guess one.
Going back to freedom boats.
And thinking about the opportunity to.
Boost Brunswick in Mercury penetration within the fleet corporate and franchise.
What can be given that the mix of both in the fleet.
What do you think the penetration can ultimately be.
Going over the long run to the boats and engines.
I think we have a boat brands and types that are able to satisfy the very large majority of the needs of the.
Of the freedom business.
We since the acquisition little before and since the acquisition we've been.
Doing deep dives into a segmentation of boats across the franchise locations. Obviously, we knew what was in the company owned locations.
But I think that there are no significant gaps that we count fell.
Okay.
Certainly over time, so we will be and I think the other thing that we can offer here as I mentioned earlier, that's really important to a franchisee.
We've got a fantastic Mercury engines, we got wonderful Brunswick boats, we already we also have this range of.
Technologies and financial services.
That can be extremely attractive to a franchisee.
And you know when those businesses, where they're certainly looking closely at their margins. We think we can.
We can provide every incentive for our franchisees to want to.
Our work with not just our our physical products, but also our services.
Which which obviously expands the margins and I would point out that the financing side of this is not something that.
Needs to be developed we've been developing this capability over the last three to four years.
As we've been.
Piloting.
Both clubs, we've been developing this with our floor plan lending partner and are extremely.
You know confident that that's something that can deliver benefit to the franchisees.
And there are no further questions at this time I'd like to turn the call back over to Dave for some closing remarks.
Thank you very much well. Thank you all for joining us as we mentioned at the start of this call. This is a pivotal time for Brunswick, we're delighted with the performance of our businesses. Despite despite the the market being a bit softer than we anticipated I think every portion of our business is on track.
With the strategic objectives that we had planned.
And we are doing.
I think what we're we're satisfying our shareholders with the aggressive share repurchases, we put in place.
Fully deploying the fitness sale proceeds and we're extremely excited about business performance.
We'll get through the back half of the year get our pipe bombs in line and what.
Credibly excited about the future and 2020.
And we'll look forward to seeing many of you on the road in the next few months.
Thank you.
Ladies and gentlemen, this conclude todays presentation you may now disconnect and have a wonderful day.