Brunswick Corporation

Q1 2022 Earnings Conference Call

4/28/2022

spk03: Good morning, and welcome to Brunswick Corporation's first quarter 2022 earnings conference call. All participants will be in a listen-only mode until the question and answer period. Today's meeting will be recorded. If you have any objections, you may disconnect at this time. I would now like to introduce Brent Dahl, Vice President, Investor Relations.
spk02: Good morning, and thank you for joining us. With me on the call this morning are Dave Falks, Brunswick CEO, and Ryan Willem, CFO. Before we begin with our prepared remarks, I would like to remind everyone that during this call, our comments will include certain forward-looking statements about future results. Please keep in mind that our actual results could differ materially from these expectations. For details on the factors to consider, please refer to our recent SEC filings and today's press release. All of these documents are available on our website at brunswick.com. During our presentation, we will be referring to certain non-GAAP financial information. Reconciliations of GAAP to non-GAAP financial measures are provided in the appendix to this presentation and the reconciliation sections of the unaudited consolidated financial statements accompanying today's results. I will now turn the call over to Dave.
spk10: Thanks, Brent, and good morning, everyone. Our businesses had a strong start to 2022, delivering record first quarter sales, operating earnings, and EPS. Continued focus on operational efficiency and strengthening our supply chain enabled increased production levels, and our investments in technology, innovation, recurring revenue businesses, and capacity have shaped the enterprise portfolio for further success in any economic environment. Despite the inflationary backdrop, the pace of retail sales continues to be dominated by the twin supply side challenges of very low field inventory levels and supply chain disruption. Global bulk field inventory levels were 6% lower at the end of the first quarter 2022 than at the same time in 2021, and down 12% in the U.S., and are lightly exaggerated by a slower start to spring in the northern U.S. and Canada. which is resulting in delayed deliveries and registrations for many retail sold boats. The percentage of our boat production that is already retail sold continues to be at an all-time high. Early 2022 boat show performance is encouraging, and there is no evidence of wholesale or retail cancellations. Field imagery of our larger boats in the U.S. is currently at or near zero, and consequently, there continues to be very little advertising or promotional activity. With macroeconomic and geopolitical factors driving current financial market dislocation, we took the opportunity to issue long-term debt at favorable interest rates and complete 80 million of share repurchases in the first quarter, and are significantly increasing our 2022 annual share repurchase target to 300 million. Later in the call, Ryan will provide you with further details behind our updated guidance for 2022. Before taking a look at our segment performance for the quarter, I wanted to spend a few minutes talking about the external factors and influences we are monitoring and managing, some on a daily basis. First, I'd like to address both the sentiment in the face of the macroeconomic pressures and geopolitical issues currently at the forefront of many people's minds. Our internal surveys continue to indicate that intention to boat and to buy a boat remain essentially unchanged versus 2021, and that supply side challenges are pacing retail sales. Clearly, our businesses have not been immune to the impacts of the inflationary environment on product cost. We take a long-term view, and our overall strategy has been just to cover our cost of inflation through price increases on a dollar basis. As you know, around 80% of our boats sell for less than $50,000, and boats can be financed up to 15 years. Additionally, despite recent and forecast rate increases, on a historical basis, interest rates remain low. In terms of boat operating costs, we estimate that for the average Brunswick boater, the rise in fuel prices since early 2021 will increase their seasonal fuel bill by less than $200. Turning to geopolitical events, the tragic conflict in Ukraine and our cessation of business in Russia, Belarus, Crimea, and the disputed territories has had no significant direct financial or supply chain impact to our business. However, wholesale sales and production growth continues to be constrained, most notably now by the supply impact of the China lockdowns and associated freight and transportation delays. And the spring boating season is getting off to a slower start than a year ago in northern U.S. and Canadian markets. We are monitoring long-range weather forecasts that currently show some improvement in May, which should translate into greater boat usage and increased aftermarket P&A sales in the second quarter. I'll now provide some highlights on the performance of our segments during the first quarter. Our propulsion business had strong results versus a historic first quarter 2021, with top line growth enabled by increased production. Mercury Marine continues to expand outboard propulsion retail market share, gaining 310 basis points in the last 24 months, including over 1,000 basis points of share gains in engines over 300 horsepower. Production capacity for high horsepower outboard engines will be significantly increased by the previously announced capacity expansion in the Fond du Lac, Wisconsin facility, which remains on schedule for completion in the fourth quarter of 2022. Mercury has now delivered V12 600 horsepower Verado engines to more than 50 different OEM customers since its unveiling just over a year ago. Our parts and accessories businesses continued their robust performance, collectively delivering the highest ever first quarter revenue as both aftermarket and OEM channels prepare for the prime boating season. Our advanced systems group, with the addition of Navico, delivered exceptional top-line growth in the quarter, with healthy margins despite continued supply chain tightness and cost headwinds. Our boat business posted outstanding top line growth in the quarter, with operating margins slightly below double digits and increasing sequentially for the second consecutive quarter. Our aluminum fishing category had outsized revenue growth and robust operating margins, while our recreational fiberglass brands also posted a strong quarter. We are meeting our production plans for the year despite the headwinds, with global pipeline imagery levels remaining at the very low level of 19 weeks. Finally, Freedom Boat Club has had an incredibly busy start to the year with substantial growth in the U.S. and Europe, and now has 350 locations and over 48,000 memberships network-wide, while generating exceptionally strong synergy sales across our marine portfolio. Next, I'd like to review the sales performance of our business by region on a constant currency basis, excluding acquisitions. As expected, most regions posted substantial sales growth in the quarter versus first quarter 2021, with Canada and Europe delivering strong sales growth in every business unit. Overall, international sales were up 11% versus the prior year quarter, and U.S. sales grew 8%. Sales in Asia Pacific were also strong when compared against the historical level achieved in Q1 2021. when that region saw a 31% increase versus first quarter 2020. As a reminder, the capacity initiatives across the enterprise, but especially in the propulsion segment, will allow us to better satisfy the immense international demand and backlog for our products. As we discussed during our January earnings call, the industry experienced more pronounced supply chain disruptions than anticipated in the second half of 2021. with continued strength at retail, leading to a more significant inventory-constrained retail environment. As expected, this trend continued into the first quarter of 2022. As mentioned, our indicators suggest the reported industry retail declines are being driven by a lack of product. We viewed the delayed deliveries to end consumers in northern boating markets as transitory, with deliveries expected to pick up when the weather improves. which will be reflected in future SSI reporting. U.S. lead generation, dealer sentiment, and other leading indicators all remain very positive, and we are essentially sold out of our 2022 wholesale production slots, with some brands being sold out at retail for 2022. Ryan will provide some additional commentary on this point during his discussion of the pipeline. Brunswick's retail performance in the first quarter was broadly consistent with the overall market performance, without performance in recreational fiberglass products and pontoons. U.S. outboard engine unit registrations were down 3% in the first quarter for the industry. On a rolling 12-month retail sales basis, Mercury continues to gain significant market share, capturing more than 400 basis points of share over the last 12 months in 200 horsepower and greater categories. I'll now turn the call over to Ryan for additional comments on our financial performance.
spk07: Thanks, Dave, and good morning, everyone. Brunswick delivered yet another fantastic quarter with record first quarter sales, operating earnings, and EPS. When compared to prior year, first quarter net sales were up 18%, with adjusted operating margins of 15.8%. Operating earnings on an as-adjusted basis increased by 10%. an adjusted EPS of $2.53 increased 13%. Sales in each segment benefited from higher prices implemented since the first quarter of 2021 and increased sales volumes, partially offset by supply chain inefficiencies and unfavorable changes in foreign currency exchange rates, while each segment's operating earnings continue to be impacted by increasing inflationary pressures and spending on growth-related initiatives. Turning to our segments, our propulsion business delivered yet another quarter of strong top-line growth, with a slight earnings increase versus a historically strong first quarter of 2021. Revenue increased 7% versus the first quarter of 2021, as strong global demand for all product categories continued to be enabled by increased production levels. Operating margins were lower by 110 basis points as higher sales and favorable absorption were more than offset by higher manufacturing costs primarily caused by inflation and continued investments in capacity and product development. Note that although we've been taking price in certain markets and product lines, the majority of the propulsion price increases occur from this point forward in the year. Our parts and accessories businesses saw a 34% increase in sales and a 19% increase in adjusted operating earnings due in large part to the 2021 acquisitions of Navico, Relion, and Sematronics. Excluding the impact from acquisitions, organic P&A revenues grew by 2% against a very tough 2021 comparison. Despite sales and earnings being impacted by supply chain constraints leading to increased sales backlogs, together with a slower start to the boating season in northern markets due to unfavorable weather conditions. As anticipated, adjusted operating margins of 18.9% were down when compared with the prior year quarter, primarily due to the impact of recent acquisitions and increased input costs. Our boat segment delivered strong top-line growth and solid earnings increases despite continued supply chain disruption and cost inflation. Sales were up 18% and adjusted operating earnings were up 6% when compared with the first quarter of 2021, with five of our brands exceeding 10% operating margins for the quarter. Sales increases in the quarter were led by particular strength in aluminum freshwater, including our pontoon businesses and our recreational fiberglass brands. Increased volume and pricing enabled solid operating earnings growth, which was also impacted by higher costs due to manufacturing inefficiencies resulting from supply chain disruptions and ramp-up costs at Boston Whaler's Flagler facility. Freedom Boat Club, which is included in business acceleration, contributed more than 3% of the boat segment's revenue during the quarter. Turning to pipelines. We produced and wholesale sold more boats in the first quarter than we did in the first quarter of 2021, a remarkable achievement given the current supply constraint environment. Supply chain challenges, including delays in receiving certain components, continues to result in the deferral of shipping certain nearly completed boats to subsequent quarters. Dealer pipeline inventories decreased from the first quarter of 2021 by about 1,000 units to a historically low 13,600 units. This translates to just over 19 weeks of inventory on hand measured on a trailing 12-month basis, which is about half of where inventories typically stand at the end of the first quarter. Drilling deeper, of the 13,600 global pipeline units, only 7,000 of those units are located in the United States, with only approximately 5,000 of these units actually available for sale. The remainder of the units are already retail sold, most of which are held by dealers in the northern U.S. boating markets, to be delivered to customers in the second quarter as weather begins to improve. Inventory levels also differ by brand, with certain fiberglass products, including Boston Whaler, having on average less than one boat in inventory per U.S. dealer. As a result of these dynamics, and despite increased production in 2022, we expect that inventory weeks on hand in 2022 will follow a similar trajectory to that experience last year. Moving to our outlook for the remainder of the year, despite the current headwinds Dave and I have discussed, our Q1 operating outperformance puts us in a position to raise full-year EPS guidance. Even after accounting, for the 25 cents of additional interest expense related to our first quarter debt issuance. In addition, our accelerated and additive share repurchase strategy provides incremental benefits for the year. These benefits, when taken together with a slightly improved view of full year top line growth, results in us raising our full year adjusted diluted EPS guidance to between $9.80 and $10.30. Note that the M&A completed and announced here in April has been included in this outlook, providing a very small benefit for 2022 with a more meaningful revenue and earnings contribution in 2023 and beyond. I'll finish my comments this morning by highlighting certain P&L cash flow and capital strategy assumptions that have changed versus our original full-year 2022 guidance. As Dave mentioned earlier, the issuance of additional long-term debt in the first quarter has increased our estimate of full-year net interest expense to approximately $95 million. As part of the debt offering, we retired the remaining $57 million of our 2023 term loan, which as of now likely completes our debt retirement activity for the year. In February, we also increased our dividend to $1.46 per share. Our decision to increase share repurchase target given the current market dislocation will result in our average diluted shares outstanding for the year to decrease to between 76 and 76.5 million shares. As a reminder, we repurchased $80 million of shares in the first quarter and another $10 million thus far in April, and we anticipate second quarter repurchase activity to be no less aggressive than our first quarter cadence. Additionally, we anticipate slightly greater working capital usage for the year, primarily related to our businesses holding higher levels of inventory to ensure consistent production levels. Our anticipated earnings impact due to tariffs has improved by $5 million due to certain China 301 exclusions being reinstated in March, but still results in an estimated $60 million headwind, primarily due to the 40 to 60 horsepower engines we produce at our China facility still being subject to the tariffs. I will now turn the call back to Dave for concluding remarks.
spk10: Thanks, Ryan. As anticipated, our business acceleration team has had a very busy start to 2022. Freedom opened its 350th global location in Denmark, which is the first location in the Nordics, a strong boating region. Freedom also continued the expansion of its corporate footprint in key markets by acquiring four locations in the Atlanta area and continued to transition the branding of its recently acquired boat club locations throughout Spain. Business Acceleration also acquired J&R Marine, a portfolio of marine assets in the southern United States, including the greater Atlanta area, to expand shared access advance its boating as a service ecosystem strategy with subscription-based models, and fortify plans to establish a regional marine operating center that will support Freedom Boat Club and Boateca. Before we close out our comments this morning, I wanted to leave you with a few more updates. On March 7th, we launched our second consecutive Virtual Investor Day and held a follow-up Q&A session with the investor community. If you haven't done so already, I would encourage you to view these materials, which highlight the company's strategy through 2025. The materials can be found on brunswick.com. In late March, we published our third annual enterprise-wide sustainability report, highlighting the company's industry-leading sustainability achievements and announced the hiring of Jennifer Koenig, the company's first chief sustainability officer. furthering Brunswick's ongoing commitment to advancing our enterprise environmental, social, and governance strategies. Navico announced its first major capacity expansion since joining Brunswick in October 2021. The expansion is expected to create more than 100 additional jobs at its Ensenada Mexico facility and will increase vertical integration and production capacity to deliver the necessary volume growth in addition to increased supply security to fulfill record demand for Navico's award-winning products. Mercury continued its string of successful early-season saltwater boat shows that included Miami, Dubai, and Palm Beach, at which it captured record share of outboard engines on display, particularly in high-horsepower applications. Brunswick also continued to receive recognition for innovation by winning seven Boating Industry Top Products Awards, spanning our businesses and product portfolio. Brenna Preisser was featured on CNBC, highlighting the company's leadership in DEI. And we also received recognition from Forbes as the best employer for diversity for the third consecutive year. Before I finish, I want to thank all our global employees who once again continue to deliver outstanding business performance and advance our next wave strategy despite the very dynamic external environment. Thank you. We'll now open the line for questions.
spk03: Thank you. And ladies and gentlemen, at this time we'll be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we pull for questions. Thank you. Our first question comes from Sian Su with BNT Paribas, please go ahead.
spk09: Hi, guys. Thanks for the question. You mentioned a slower start to the season with, you know, maybe a poorer weather. But maybe can you talk about trends exiting the quarter and into April? Like, for example, the parts business was only up, I think, 2% on an organic basis. But curious how that evolved through the quarter and if you saw any kind of acceleration into April.
spk10: Yeah, thank you for the question. Obviously, it was up 2%, but against a huge comp last year in an earlier spring. So we're pretty comfortable with where the business is. Certainly, there will be a little bit of phasing, but you need to think about all of this as a phasing issue. The P&A business and sales profile is people get their boats – For the season, that occurs every year, just a question of which week, two weeks forward, two weeks back, whatever it is, the spring starts. And then there's a usage profile, and then there's a winterization profile. So I would say we're extremely comfortable with the way that P&A is performing, the way it's stocking. It's comping against a huge year last year, and we are facing a little bit of a later spring, so... I see it as a very positive environment for us.
spk09: Okay. Got it. Thanks. And then you talk about how, you know, 22 retail essentially sold out and you're not really seeing any cancellations, but maybe can you help give us some more color on how solid the backlog is, you know, and how hard it is for consumers to cancel orders. I think you're taking the pause and you take, you know, you have all the customer information, but maybe some more color there. And, you know, also within that, you know, if you're taking pricing, you know, over the course of the year as costs are going up, are you retroactively, you know, taking the price up for boats that have been pre-sold? Thanks.
spk10: Yeah, so, I mean, in terms of cancellations, it depends on the type of boat and a little bit on the price. the individual dealer even to some extent. If you're pre-ordering a large boat, there's probably a deposit of around 10% that is potentially at risk. But the reality is if you are intending to order it sometime in the future, that might not really be at risk. In terms of smaller boats, the kind of penalty for cancellation is pretty modest. I would say that the really, I think, encouraging thing for us here is we're seeing no sign of anything, either at a wholesale level or a retail level. Our dealers have one question, really, which is, can I get more boats? There is no momentum in the other direction at all. It's just, I need more boats. Please get me more boats. And I believe that it isn't... You know, cancellations on a retail level are not associated with anybody wanting to cancel who is unable or something or going to forfeit something for cancellation. I think it's all about people want to get the boat. In terms of retail pricing, normally, at the moment at least, I think a lot of dealers have allowed themselves some flexibility in their retail contracts to pass through pricing. Obviously, we don't directly control the retail pricing. That's up to the dealer. It's not up to us how they handle that. And we've explained before how we're handling wholesale pricing, which is we are monitoring inflationary trends as tightly as we possibly can and trying to adjust appropriately, but on a more frequent basis than we would historically have done.
spk03: Thank you. Our next question comes from James Hardiman with Citi. Please go ahead.
spk13: Hey, good morning. So I wanted to actually dig into that last point about pricing a little bit. There have been a number of price increases and maybe just a significantly promo being eliminated. But if I were to look at your three segments, where are we in terms of total sort of realized price versus 19? And maybe can you speak to the difference levels of pricing power in those respective segments obviously everybody's concerned that we'll see the the reintroduction of demand elasticity where would we see that first where would we see it live yeah james good morning uh dry and i'll i'll take that to start and then dave can can follow up we obviously uh have taken price in all all three segments if i look at propulsion
spk07: To date, it's been relatively minor versus, I think you asked for 2019, 2020, maybe we'll just say kind of pre-COVID. That looks low to mid-single digits up to this point, maybe mid-single digits because we're talking a couple of years, which is just slightly over really what they normally do. We suddenly comment that propulsion, U.S. outboards certainly will see a little bit more price here at the remainder of the year so that that number will go up a little bit uh if i move then to kind of the parts accessories business this also depends on whether it's aftermarket or the oem side of the of the house aftermarket uh has has gone up probably uh less than the oem side certainly uh the the aftermarket increases kind of look call it mid uh mid to high single digit uh increases to date with, again, more probably on the horizon with OEM probably looking more than that, call it low double digits or so. And then if I look at both, I mean, this is where we've been pretty clear, I think, on call after call. If you look cumulatively, you're probably somewhere in the mid-teens to about 20%. If you look at what would be kind of two plus years, a couple of model years, and then we would anticipate a little bit more of price ability as we move into the model year 2023. You know, elasticity is always a good question, and you probably are going to know what I'm going to say, but this is a long-term game for pricing. We are attempting to use price to cover inflation, which we all know is is prevalent in the environment. But we also are cognizant that we don't want to outprice our end consumer. So we touch just about every part of the boating ecosystem between the engine, the parts in the boat. So we're being relatively prudent across all segments and phasing the price in to cover the inflation as it arises, but not taking more than necessary.
spk10: It's one additional comment. We've said for a long time about 80% of our boats costing less than $50,000. And they used to be over 80%. But we checked it just a couple of months ago, and it was 78%. So over this whole period, we still have a huge portion of our portfolio aimed squarely at middle income consumers and still extremely affordable. So that still gives you a good idea of what the kind of pre-taught pricing looks like, even though we've certainly been forced to elevate some pricing. We are in this for the long term.
spk13: That's great color. And then just one more for me. The $300 million in projected share repurchases now seems to be a pretty big signal about where your stock is trading relative to what you think intrinsic value is. Maybe speak to that and whether or not you might lean into that even further if the stock continues to be depressed.
spk10: Thanks. Yeah, thanks, James. Yeah, I think, obviously, we're trading at a discount. Obviously, the sector has had a significant pullback, and we believe that we are significantly discounted to any measure of intrinsic value. So this is a good time for us to deploy capital. We have a very strong balance sheet here. and are able to deploy capital very flexibly. And we certainly think that this is a great time to be repurchasing shares. And could we lean more into it? Yeah, absolutely. We could lean more into it. We think that that's a good target for now, but we'll see how the year develops and whether that continues to be the right value place to put the put our dollars.
spk07: It's fair to say, though, it would, James, very likely only go up, not down, if that's what you were asking. Perfect. Appreciate the color, guys. Thanks, James.
spk03: Our next question comes from Mike Swartz with Truist. Please go ahead.
spk12: Hey, guys. Good morning. I just wanted to touch on your retail outlook for the year and maybe as it pertains to your prior outlook of I think you said low single-digit growth and understanding that retail and wholesale are fundamentally separated for the time being. But if you give us a view of just with some of the supply chain issues that you've seen, how or, I guess, has your retail outlook for the year changed at all?
spk10: Yeah. Hi, Michael. You know, I think we discussed this about whether we should do anything about it. I think the situation for us at the moment is it's very early in the year and Our production remains strong. We have some specific kind of phasing issues, if you like, I think, around this time of the season, which is a bit of an inflection point. So we simply don't have enough new information to be able to update that call at the moment. If we see something developing in a different direction, obviously we'll do that. But we just felt that modifying that in one direction or another, we just don't have enough information right now.
spk12: Okay, fair enough. And then maybe just on the, I apologize if I missed this as well, but just on the boat production expectations for the year, I think previously you'd called out about 40,000 units. Is that, and I know you took guidance up here, so is that still the right number and we should think about maybe the increment as being pricing or something else?
spk10: Yeah, that's still the right number for us. I think the Both group and the teams in our individual plants and brands have done a great job in the first quarter of the year. I expect they'll continue to do a great job in the balance of the year. So, yeah, that's a good number.
spk12: Okay, great. Maybe just a final question, just at a very high level. Maybe just give us some color or just qualification of how the supply chain looks today relative to two months ago.
spk10: Yeah, you know, it migrates. I think it's very clear that the area that is, you know, potentially the most disruptive is the COVID-related lockdowns in China. There are other areas that have generally improved in terms of availability. There's still inflation. Obviously, there are some new inflationary pressures associated with events around the world. But generally, as COVID has diminished, at least for our domestic supply base, we're seeing improved performance, I think, not uniformly, but generally improved performance. And at the moment, we are focusing our attention particularly on, you know, engineered components coming out of China as the biggest potential source of disruption. But As always, so far we've continued to manage our way through that. It's disruptive, but we find a way and expect to continue to find a way.
spk12: Okay. Thank you.
spk03: Thank you. Our next question comes from Anna Glaskin with Jefferies. Please state your question.
spk01: Hi. Good morning. Thanks for taking our question. Thanks for giving the color on, you know, the expected change in fuel costs for the average voter. Could you maybe give some perspective on what you're assuming in terms of usage, you know, maybe versus historical averages given, you know, participation has benefited over the past two years?
spk10: Yeah. So, hi, Anna. So, yeah, good question. So, we kind of did the calculation based on our kind of average boats, average boats, along with some data that's really well established from third-party sources. So, for example, the EPA publishes average boat usage data every year. They say boats are used about 35 hours in a season. Obviously, that's seasonality here as well in the northern markets. Season is shorter here. So if you look at our average horsepower, which is in the kind of 140 horsepower range for an outboard, you look at the boat that it's on, the fuel consumption, you multiply that by the hours and the delta in fuel price between earlier this year and earlier last year, which is in the $1.50 range, something like that. You come out with about $160. And so we, you know, Just to round that up a bit, we put it at $200. Obviously, if you have a more powerful boat, if you have more engines on the boat, the delta is going to be higher. But we thought it would be useful to dimension it for the average boat that we make and also to leverage really well-established third-party kind of average usage profiles. That was the calculation. You will see in other – I know that there was another estimate done to do with wake sports boats. They tend to use more fuel because they use a lot of power and torque to generate that big wake behind them. But for our average boat, remember, about 2 thirds of our boats are aluminum fishing boats. The fuel usage is very low. Just another thing, it's about a quarter of the annual fuel usage of a compact car. So that's another way to think about it.
spk01: Great. Thanks. That's really helpful. And then, you know, glad to hear the mercury capacity expansions are still on track for 4Q. As we think about that incremental capacity and higher horsepower, can you give some perspective on, you know, the product and mix and channel shift impact margins as we see that ramping?
spk10: yeah i can well first of all i can tell you it's all spoken for already so um which is very exciting um so uh yeah that's really good i think we've you know we've said before it's aimed at the higher horsepower uh engine ranges so um 175 horsepower and above and we're adding around 60 capacity in that horsepower in that set of horsepower nodes from 175 horsepower upwards it is all on track at the moment, and we're very excited about being able to bring those additional customers on board.
spk07: And also, Anna, from a margin perspective, we've been pretty clear that we have certain large customers that often take a big chunk of the available inventory. The additional capacity will enable us to sell more engines internationally to the repowered dealer channel and to other OEM customers that maybe aren't even receiving engines today. those channels often are margined up, and so that will enable a little bit of margin expansion, which is what you're seeing, obviously, in the back half of the year, certainly in the fourth quarter, then into 23 as you looked at our strategic plan, up to 25. Great.
spk01: Thanks very much.
spk03: Thank you. Our next question comes from Kevin Heenan with J.P. Morgan. Please go ahead.
spk06: Hey guys, thanks for taking my question. I guess on the boat segment revenue, with the retail side coming in a bit softer year to date, your production's on track, I guess, what is driving the increase in your full year revenue outlook? Is that pricing or more confidence in underlying demand?
spk07: Hey, Kevin. You know, thanks for the question. It's actually a good question. You know, when we look at, you know, we're sitting in January and we're looking at a whole year of output, there's a lot of uncertainties. And certainly when we were in January looking at full year segment numbers, there was even more uncertainty than there is today in terms of inflation, supply chain, and the like. I think we're just no fundamental changes in assumption, except that now we are one quarter in and production is up over last year. And we anticipate that continuing. As Dave said, the boat business has been hit probably the most with inefficient manufacturing due to supply chain just not getting – it's literally as easy as one or two parts on a boat that need to be finished and completed before it can be wrapped and sent to a dealer. The boat business has gotten their share of that. But despite that and in light of it getting a little better, as Dave mentioned – This is a production up over in the first quarter, and it seems like we're on pace to be able to do that for the year. So just, you know, we're three months closer to the end of the year, and we're a little bit more dialed in in what the business can deliver. Got it.
spk06: Thanks. That's helpful. And just to follow up, kind of dovetailing on Anna's question, on the propulsion segment, I guess with the capacity expansions coming on in 4Q, just trying to bridge the gap between the mid-teens revenue outlook this year with the 8% CAGR you've laid out longer term, is there any reason you can't sustain the double-digit growth into next year as the capacity comes online? Or is there something else to consider in that trajectory? Thanks.
spk07: No, another good question, and Dave can chime in as well. You know, when you do a long-term projection, we did four years this year, there's so many puts and takes, not only pricing and production capability, but where those engines go, what the market performs. If the question is, could there be outperformance, the answer is yes, there absolutely could be. But as we look year in and year out, you know, the CAGR is exactly what it is on average. And Coming out of this year and looking ahead, certainly we'll have the ability with more engines and a better mix potentially to outstripe that estimate.
spk03: Thank you. And our next question comes from Fred Whiteman with Wolf Research. Please state your question.
spk04: Hey, guys. How are you? Could you just give a little bit more detail on what you're seeing out of Europe from a retail perspective, any of the geopolitical? situation rubbing off on people's willingness to spend on some of these discretionary products?
spk10: Yeah, thank you for the question. I think so far sales are holding up well in Europe across all of our categories. I think obviously there's likely to be a differential between some of the countries that are somewhat more geographically removed from the immediate conflict than others. But so far, things are holding up, despite the fact that there continues to be inflationary pressure and obviously sentiment issues in Europe. Just as in the U.S., we have more demand for our engines, particularly in Europe, than we've been able to satisfy. We have a significant backlog that we need to get through. And similarly, on the P&A side, We have a similar backlog of products that we need to get through. So we're not seeing softness at the moment, but obviously because of what's going on in the region, we've got our antenna up.
spk04: Makes sense. And then can you just talk about the J&R transaction and how getting more involved with the dealership channel sort of fits into your longer-term strategy? Sure. Is this something that we should sort of expect a little bit more capital allocation to go to going forward? Is it a one-off? How should we think about that?
spk10: Yeah, I think a couple of things to think about. One is that, you know, we made two transactions. One was J&R Marine, and then the other were the bulk clubs on Lake Lanier. And the Atlanta area is really a very high potential area for freedom that is – not populated with nearly enough clubs. So I would think about those two transactions as, first of all, an opportunity for us to get more Freedom Clubs in the Atlanta area significantly more. There's a lot of growth potential. And then, you know, J&R Marine has four marinas. Only two had boat clubs in them. So an opportunity to even more emphasize freedom and build out freedom within that acquisition. One of the things we talked about on Investor Day was our boating as a service ecosystem strategy. We sometimes call build around the boater. What you've seen us do with freedom is, first of all, it's a great business to stand alone. The margins are great. The growth is great. But you've seen us now deliberately feeding more engines and boats into freedom. And on the front side, we use more P&A in freedom. And you've seen us establish the Botteca pre-owned boat sales platform to get more margin as boats exit Botteca. So there's a tremendous opportunity for synergy around Botteca. And we have been exploring other ways in which we can add synergistic margin and add growth to that ecosystem. And JNR Marina allows us to prove out some of those concepts. We'll be a bit more forthcoming on exactly the specific detail. But we need to build some operational muscles, and we needed to do it in – in the real world to prove out some of those concepts. But essentially, it's an extension of our boating as a service ecosystem strategy, and that's the majority of it. And as we begin to evolve that more, we'll share more on the specific details.
spk07: And maybe on your capital strategy point, Fred, it's a modest play in line with the kind of small bolt-on deals we've done year in and year out that's kind of embedded in our in our existing capital strategy for the year. So that's how you should think of it from a spend perspective.
spk03: Thank you. Our next question comes from Joe Alcibello with Raymond James. Please go ahead.
spk11: Hey, thanks, guys. Good morning. I guess the first question I want to say on the retail outlook for you guys in the industry, given where field inventories are, how much is retail coloring your financial forecast for this year and maybe how are you thinking about next year? And I guess what I'm I'm trying to ask if the trends that we saw in Q1 persist, where the industry is down 11, is there a downside to your guide, or is it almost independent at this point?
spk10: No, not really. At those levels, as we mentioned, our backlogs are very high. We're sold for the year on boats. Backlogs in engine and P&A are very high, so I would say that we are extremely robust to most foreseeable developments. Yeah, it's not really coloring our 2022 thoughts at all. And as we get further into the year, obviously, we'll be developing a view on what that looks like for 2023. But at the moment, we have literally not changed anything that we're doing on capacity expansions or any of the other initiatives that were part of our overall strategy.
spk07: And, Joe, I'd also note that some of the additional color we gave on the pipeline slide today, I mean, there are 4,000 or so retail sold boats that are still sitting in our dealer hands waiting to be delivered. Those are not in SSI. So it is fair to say, as it always is at this time of year, that the true retail is probably even more dislocated than from what SSI is seeing. Now, who knows how that's going to shake out, but as Dave said earlier, if the wholesale is there, there's no doubt that we believe the retail will be there as well. Okay. Very helpful.
spk11: And maybe just to kind of follow up on that, if I look at your Q2 guidance, a lack of earnings flow-through versus what we've seen historically. Are you expecting anything to get worse from a supply chain standpoint? Does that reflect higher interest expense? Why the lack of earnings in this quarter?
spk07: Yeah, Joe, this obviously got a little bit more attention this morning than we anticipated. There was no change in our view on the second quarter from January. We're going to incur an extra just shy of $0.10, like $0.08 of interest given the debt that we took out. And the benefit from share repurchases obviously will not cover that because that's more back half loaded just given the way the math works. So, really, you're getting more interest than anticipated. And to be fair, it's still the second quarter. There is an uncertain environment, and we've given ourselves a little bit of room for flexibility. But, no, you should not. The underlying assumptions of the strength of the market, our ability to deliver and perform have absolutely not changed from January. Okay. Great. Thanks, guys.
spk03: Thank you. Our next question comes from Eric Wold with B. Riley. Please state your question.
spk14: Thanks. Good morning. Just a couple of follow-ups kind of on the comments around the boat's price, $50,000 and below, obviously, the majority of what you sell. I guess going to the pricing strategy to cover cost increases, is that across the board kind of evenly with all boat price points? Do you tend to lag somewhat or could you lag somewhat on the lower end, both to not lock out buyers or does that strategy not change by price point?
spk10: Well, I think, you know, in the end, what buyers experience is the retail price. So our price is a component of that, but not the entirety of it. You know, I would say generally we are trying to cover our costs? Are we a little bit lagging sometimes? I would say we probably are a little bit lagging in some areas. Certainly, you know, propulsion, if you think about propulsion, it is a much larger portion of the cost of a small boat than it is of a large boat. And there's just, the engine is the highest technology, you know, part of an aluminum fishing boat typically. So, and if you think of what Mercury's been able to do so far, which is really hold pricing at very reasonable levels, as Ryan mentioned earlier, that is obviously more helpful for controlling inflationary costs overall on a small boat than it is on a large boat. On a large boat, there are other components that, so the total bill of materials is much beyond the engine. So I think by kind of natural means, if you like, because of the good control of engine costs and pricing, we are probably controlling costs of smaller, more value-orientated boats more tightly than some of the bigger boats. And certainly given demand for the bigger boats, there's less immediate thought about any other strategy.
spk03: Thank you. And our next question comes from David McGregor with Longbow Research. Please go ahead.
spk08: Yes. Good morning. Thanks for taking my questions. Just with respect to the parts and accessories business, can you say just how dilutive the acquisitions were to the margins?
spk07: Hey, Dave. Which acquisitions are we talking about? The P&A from last year. Oh, from last year. Okay. Yeah. You know, we consistent with our guide for the year, David, Navico has quite strong gross margins and operating margins that are slightly dilutive to the segment, although still quite accretive to the overall Brunswick. I think what you've seen is even in the first quarter, you saw probably OPEX come in better than anticipated, certainly better than our, internal forecast. And, you know, NAVICO is certainly a place where we're right-sizing kind of SG&A to match the rest of the organization. You'll continue to see that throughout the year and even into next year. But there are certainly some pockets where we can improve, but that's how we look at it. You know, NAVICO relying on sematronics collectively would be still accretive to Brunswick, but slightly dilutive to the overall P&A operating margins.
spk08: Okay, got it. Thanks for that. And then I guess just get back to this whole discussion today around, you know, 78% of the boats are less than 50,000. I'm not sure if you have sort of access to data through your dealer partners, but any sense of what percentage of sales are based on credit or incorporate credit into the purchase?
spk10: Yeah, of the kind of credit transactions that we see, about 50% are bought with credit. But there may be some other financing that goes on behind the scenes that we're not aware of. But yeah, of the ones that we can see, about 50%.
spk03: Thank you. And our next question comes from Derek Johnson with BMO Capital Markets. Please go ahead.
spk05: Hey, good morning. Thank you. So when you talk about the delayed deliveries, retail sold boats and some northern markets, What exactly does that mean? I just want to know definitionally, because you say it's not an SSI, so they're not registered. So are these just deposits? And really what I'm getting at, are these cancelable?
spk10: No, these are boats that have been bought, but not put in the water. And so, yeah, they're not cancelable. They're fully paid up boats that, for example, in Minnesota and And to a large extent in Canada, there's still ice on the water. So they won't register them until they go in the water. They're fully paid up boats, completely sold, just not registered yet.
spk05: Okay. Okay. Got it. Great. And then in terms of your boat business, you talked about aluminum fish, aluminum freshwater and recreational fiberglass outperforming a quarter. Reasons behind that and should that continue?
spk10: I think the reasons behind it, we have a very strong boat portfolio in that aluminum category. And I think our production has been very solid. So if you think across our aluminum product lines, Lund is a really premium aluminum freshwater boat, really almost like the Boston Whaler of the aluminum world, if you like. So sales of that have been really strong and continue to be. And I would say that we have also been particularly strong in pontoon, which is part of our aluminum boat group as well. That is a category with extremely high demand, and our productivity has been very good despite the backdrop. So we have a good product range. We've done a lot of product development in that area, which makes our product very fresh. Our production capability has been sustained very well. So, yeah, just a combination of good operating and fresh product performance, I think.
spk07: And then, Garrett, from a finance side, I'm as interested in their ability to manufacture the product to meet the design specs. And I would say I'll call out C-Ray and Bayliner that have both done a fantastic job of not only manufacturing product to – that consumers want, but also manufacturing it at the right cost. So you've seen good top-line growth and good margin expansion from both of those brands, which has resulted in some of the fiberglass goodness that we've discussed.
spk05: Okay, thanks. And maybe if I could ask just one more. You talk about shows like Miami and Palm Beach, but what about some other shows, say interior shows like Cleveland or Minneapolis? How are shows like that going?
spk10: You're generally good. When I last looked, which is fairly recently, our show sales this year were ahead of our show sales last year. Not a huge amount ahead, but a bit ahead. And the reason why we emphasize the biggest shows, a couple of reasons. One is a lot of the regional shows are really dealer shows, and dealers don't have any inventory. So sometimes dealers won't even attend the show because they have nothing to sell. So you will see a lot of kind of variability from one regional show to another regional show, depending on whether, I mean, dealers, unless they make additional money, they're not going to go to the show. The bigger shows like Miami are much more organized. The OEMs are a much bigger part of the presence of boats there. Some of the boats are not dealer boats. They're our boats. So they provide a much more consistent picture in this environment than the regional shows do. We can talk more about regional shows, but you'll just see them more variable depending on who's got imagery.
spk03: Thank you. And at this time, we would like to turn the call back to Dave for some concluding remarks.
spk10: Well, thank you all very much for joining us and for the great questions. As you've seen, despite the very dynamic external environment, our business continues to perform exceptionally well, certainly from an operating perspective, but we're also making great progress with the strategic initiatives that support our 2025 plan, including the capacity expansions, new product launches, and the M&A. In Q2, we expect to continue to be in this dynamic environment, but as you've seen from With the portfolio of businesses we have built over several years, the high degree of recurring revenue, the high growth potential, the structurally higher margins that we have, that position is extremely well, both for Q2 and the balance of the year. So we remain extremely excited about the year, completely on track with our plans for the year, on track with our plans for 2025, and we're very excited. Thank you. Bye. Thank you.
spk03: All parties are in doubt, disconnect.
spk10: Have a great day.
Disclaimer

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Q1BC 2022

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