Brunswick Corp Q1 FY2021 Earnings Call

Good morning, and welcome to the Brunswick Corporation's First Quarter 2021 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.

Good morning and thank you for joining us. With me on the call this morning are Dave Foulkes, Brunswick's CEO; and Ryan Gwillim, 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 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 consolidated financial statements accompanying today's results. I will now turn the call over to Dave.

Thanks, Brent, and good morning, everyone. Our businesses had a fantastic start to 2021 with a very healthy marine market, strong boating participation and outstanding operating performance, driving historic financial results. Robust retail demand for our products continues to drive low field inventory levels, with increased production across all our facilities necessary to satisfy orders from our OEM partners and dealer network. Our teams have performed exceptionally well in the face of supply and transportation headwinds, tighter labor conditions, and continued impact from the COVID-19 pandemic. And we are excited about our ability to further harness the positive momentum we've generated to propel our growth and industry leadership. Our Propulsion business continues to deliver outstanding top-line earnings and margin growth, outperforming the market by leveraging and expanding the strongest product lineup in the industry. Our parts and accessories businesses delivered strong top-line growth and robust operating margins as a result of increased boating participation, which drove strong aftermarket sales, together with high demand for our full range of OEM systems and services, as boat manufacturers attempt to satisfy retail demand. Our boat business performed well, as anticipated, in the quarter, reaching double-digit adjusted operating margins for the first time in over 20 years. Despite elevated production levels consistent with our plans for the year, the continued surge in retail demand is still driving historically low pipeline inventory levels, with 41% fewer boats in dealer inventory at the end of the first quarter versus the same time last year. Finally, Freedom Boat Club has had an extremely busy start to the year, which I will discuss further in a couple of slides. We have exceptional momentum as we enter the prime retail season in most markets, and as you can see from our significant guidance increase, we are confident in our ability to perform for the rest of the year and well beyond. Before we discuss the results for the quarter, I wanted to share with you some updated insights from 2020 concerning our boat buyers and Freedom Boat Club members that reflect very favorable trends for the future of our business. We continue to outperform the industry in attracting new, younger and more diverse boaters, positioning us for very strong growth in the years to come. Last year, Brunswick's average boat buyer age was two years younger than the industry average and reached its lowest level in over a decade. Additionally, Brunswick's first-time boat buyers averaged five years younger than our overall boat buyer demographic, and three years younger than the industry. Equally encouraging was the fact that the percentage of Brunswick female boat buyers in 2020, while still a minority, equaled the highest percentage on record and first-time female boat buyers entered at double that rate, which was a notable 700 basis points higher than the industry. In Freedom Boat Club, we saw even more promising trends with the average Freedom member being almost three years younger than our typical boat buying customer, and female Freedom members making up 35% of our member base in 2020 and 2021. These trends are an extremely important validation of our strategy to secure a healthy future for Brunswick and are also favorable for the entire marine industry. I also wanted to briefly update you on some very important awards and milestones for Brunswick during the first quarter, which are important in positioning Brunswick for investors and employees, and our ability to secure top new talent. I am pleased to announce that for the second consecutive year, Brunswick has been recognized by Forbes as one of the Best Employers for Diversity. Those recognized were chosen based on an independent survey of over 50,000 employees working for companies employing at least 1,000 people in their operations. Diversity and inclusion are cornerstones of our culture and a source of innovation and inspiration for our Company. We also published our 2020 Sustainability Report at the end of March which reviews the exceptional progress we have achieved against our sustainability goals, including our prioritization of the health and safety of our employees. In 2020, we reported the lowest recordable incident rate in Company history, in the face of immense challenges resulting from the COVID-19 pandemic. And I also wanted to share with you a snapshot of what the return to in-person boat shows looks like. The Palm Beach International Boat Show was recently held for the first time since the Spring of 2019. This was the first major in-person saltwater show of the 2021 season and the outcomes were very positive. Attendance was up and our brands outperformed the broader marine industry. Over the course of the four-day show, Sea Ray and Boston Whaler more than doubled the number of boats sold this year versus 2019 and revenues more than tripled, driven by increased demand for the recently launched models. Consumers were also able to see Mercury's V-12 600 horsepower Verado in person for the first time, with many eager to repower their boats with this new, game-changing engine. I'll now provide some first quarter highlights on our segments and the overall marine market. Our Propulsion business continues to gain significant retail market share in outboard engines, especially in higher horsepower categories where we have focused higher levels of investment in recent years. Mercury gained share in each horsepower category over 50 horsepower in the first quarter, with outsized gains in nodes in excess of 200 horsepower. As I mentioned earlier, Mercury launched its new 600 horsepower, V-12 Verado engine in February at Lake X in Florida to much fanfare. Many OEM partners, including Fountain, Scout, Viking and Tiara, and our own Boston Whaler and Sea Ray brands, have already designed boats with this engine in mind and are taking orders. Many models are already sold out for 2021, with twin, triple or even quad configurations being very popular with both OEMs and customers. New or enhanced OEM relationships, along with significant investments in new technology, have also helped fuel the continued growth in Mercury's industry-leading controls, rigging and propeller businesses. As Mercury's growth continues to accelerate, we regularly review our capacity requirements to ensure we are able to meet projected demand and fully capitalize on future growth opportunities. In this regard, we anticipate having to pull ahead some additional capacity actions. Our Parts and Accessories businesses also experienced significant top-line and earnings growth in the quarter as aftermarket sales remain elevated due to strong participation trends and service needs, with increased OEM orders to keep up with production resulting from the accelerated retail demand. Our dealer network reports that their service centers are busier than ever, with the strong participation trends from 2020 continuing into 2021. In addition, favorable weather conditions in many parts of the U.S. are enabling consumers to return to the water early and in force. This demand drives the need for aftermarket service parts and a healthy distribution network to get dealers the products they need on a same-day or next-day basis. The Advanced Systems Group, which has a larger OEM component to its business and also serves some non-marine segments demonstrated significant growth across all its product categories and delivered strong operating margins that were accretive to the overall segment. Our boat segment had an outstanding quarter, with successful execution of its product plan, resulting in strong revenue and earnings growth, together with double-digit operating margins. Given the continued retail demand surge, 95% of our production slots are now sold for the calendar year, with many Whaler, Sea Ray and other models now sold out at wholesale well into 2022. Pipeline inventory remains at historically low levels, and we continue to hire additional workers at most facilities to ramp up production consistent with our stated plan. We remain on track with our plans to reopen and staff the Palm Coast facility and expand our operations at Reynosa and Portugal. However, it remains very unlikely that pipelines will be significantly rebuilt until 2023 at the earliest. Freedom Boat Club also continues to exceed our growth expectations, now with over 40,000 memberships and 280 locations, which is more than 100 new locations since we acquired Freedom in 2019. Freedom has been expanding both through acquisition and organic growth in 2021. We acquired franchise operations in major boating markets including Chicago and New York, and opened our first location in the UK. As a reminder, having company-operated locations allows us to gain the full economic benefits of the territories, and enables us to increase investment to enable faster growth. In addition, company-operated locations provide the opportunity to get close to the end boating consumer and allow us to enhance our other offerings including Boateka and our Finance and Insurance businesses. You will hear more from Brenna about our plans for Freedom and our other Business Acceleration initiatives on our upcoming Investor Day, which I'll discuss at the end of today's presentation. The outstanding operational and financial performance I have been discussing has not been without some external challenges that our businesses continue to manage and mitigate, sometimes on a daily basis. Our supply chain teams in particular performed exceptionally well. Winter storms and resulting power outages in the Central and Southern United States affected oil-based product production and supply, including our third-party producers of resin and foam, while tight semiconductor supply, raw material shortages, transportation disruptions, and resulting cost increases, continue to present challenges to our businesses to varying degrees. However, the global reach of our supply network and our unique scale in the marine industry, together with our purposeful vertical integration, have so far enabled us to mitigate these challenges and keep our production plans on track for 2021. I want to thank our supply teams, as well as our third-party supply partners, for continuing to work together to ensure the manufacturing continuity necessary to satisfy our robust market demand. Finally, labor conditions remain tight in many locations in which we manufacture products, but our talent acquisition teams have been working hard and successfully to add manufacturing and other talent to our teams as we increase production. Next, I would like to review the sales performance of our business by region on a constant currency basis. First-quarter sales increased in each region, with international sales up 42% and sales in the U.S. up 47%. International growth was very strong across all regions, with continued strength in Europe and Asia-Pacific contributing to growth in propulsion and Parts and Accessories sales. Canada continued its trend from the back half of 2020 with significant sales growth in all three segments. This table provides more color on the recent performance of the U.S. marine retail market. All boat categories reported retail gains in the first quarter, continuing the momentum from 2020. The main powerboat segments were up 34% in the quarter, with Brunswick's unit retail performance ahead of market growth rates, especially in outboard boat categories. Outboard engine unit registrations were up 21% in the first quarter, with Mercury significantly outperforming the market and taking market share as I discussed earlier. As we enter the primary selling season in the U.S., lead generation, finance applications, dealer sentiment and other leading indicators all remain very positive. In addition, similar to our comments on previous calls, at the end of March, our percentage of dealer orders received with a customer name already attached is approximately three times the percentage from the same time last year. All these factors give us high confidence in the continuing strength of the retail market as we move through 2021. I will now turn the call over to Ryan for additional comments on our financial performance.

Thanks Dave and good morning everyone. Our first quarter results were outstanding. Year-over-year comparisons are not particularly helpful given the significant COVID impact starting in March of last year, but our performance in the quarter stands on its own against any quarter from the last two decades. First-quarter net sales were up 48%, while operating earnings on an as adjusted basis increased by 116%. Adjusted operating margins were 17% and adjusted EPS was $2.24, each being the highest mark for any quarter for which we have available records. Sales in each segment benefited from strong global demand for marine products, with earnings positively impacted by the increased sales, favorable factory absorption from increased production, and favorable changes in foreign currency exchange rates, partially offset by higher variable compensation costs. Finally, we had free cash flow usage of $23 million in the first quarter as we built inventory ahead of the prime retail selling season, which is very favorable versus free cash flow usages of $144 million in the first quarter of 2020 and $159 million in Q1 of 2019. Revenue in the Propulsion business increased 47% as each product category experienced strong demand and market share gains. All customer channels showed growth in the quarter as boat manufacturers continued to ramp up production, and increased capacity enabled continued elevated sales to the independent OEM, dealer and international channels. Operating margins and operating earnings were up significantly in the quarter, benefiting from positive customer mix in addition to the factors positively affecting all our businesses. In our Parts and Accessories segment, revenues increased 52% and adjusted operating earnings were up 83% versus first-quarter 2020 due to strong sales growth across all product categories. Adjusted operating margins of 21.3% were 350 basis points better than the prior year quarter, with strong sales increases, together with favorable sales mix, driving the robust increase in adjusted operating earnings. Continuing the theme from 2020, this aftermarket-driven, annuity-based business is benefiting from more boaters on the water, which is being augmented by flexible work schedules allowing for more leisure time, with the OEM component of the business leveraging investments in technology to take advantage of strong demand from boat builders as they increase production. In our boat segment, sales were up 44%, with 31% adjusted operating leverage resulting in 10.9% margins for the quarter. Each brand had strong operational performances and contributed to the successful results, with Lund and Boston Whaler leading the gains in the premium brands, and Bayliner having another strong quarter as a mid-tier value brand. Although it's only one quarter above our stated goal of double-digit margins, this is the third consecutive quarter of margins above 9%, and we believe that we can continue this trend throughout the year and beyond. Operating earnings were also positively impacted by the increased sales and the lower retail discount levels versus 2020. Freedom Boat Club, which Dave discussed earlier, contributed approximately 2% of the segment's revenue, at a margin profile that continues to be accretive to the segment. Our boat production continues to ramp consistent with our plans to produce in excess of 38,000 units during the year. Despite producing approximately 9,400 units in the quarter, which is up 16% from the fourth quarter of 2020, we only added a few hundred units to dealer inventories given the continued robust retail market. Our boat brands ended March with just under 19 weeks of boats on hand, measured on a trailing twelve-month basis, with units in the field lower by 41% versus the same time last year. We continue to believe that our current manufacturing footprint will support the production necessary to satisfy the anticipated 2021 retail demand, but we continue to work with our brands to unlock additional near-term capacity through automation, labor and select capital initiatives, including the capacity actions announced earlier in the year related to our Palm Coast, Reynosa, and Portugal facilities, which will begin providing benefits by the end of the year. As a result of historically low product pipelines and continued very strong boating participation, including in many northern regions in recent weeks due to the early spring, production levels remain elevated across all our businesses to both satisfy retail demand and to rebuild product pipelines. These factors, together with our strong pipeline of new products and outstanding operational performance, continue to provide enhanced clarity on our ability to drive growth in upcoming periods, resulting in the following guidance for full-year 2021. We anticipate U.S. Marine industry retail unit demand to grow mid to high-single-digit percent versus 2020; net sales between $5.4 billion and $5.6 billion, adjusted operating margin growth between 130 and 170 basis points, operating expenses as a percent of sales to remain lower than 2020, free cash flow in excess of $425 million; and adjusted diluted EPS in the range of $7.30 to $7.60. We're also providing directional guidance regarding the second quarter, where we anticipate revenue growth of approximately 50% over the second quarter of 2020, with adjusted operating leverage in the low-20s percent. As we look to the second half of the year, despite extremely challenging comparisons to 2020, we still believe that we will deliver top-line and earnings growth over the second half of last year. I will conclude with an update on certain items that will impact our P&L and cash flow for the remainder of 2021. The only significant update relates to the working capital usage for the year. Projected increases in accrued expenses and accounts payable are exceeding anticipated increases in accounts receivable, resulting in a lower working capital build throughout the year. We now estimate a working capital increase of $80 million to $100 million for 2021, which together with the higher anticipated earnings, results in a stronger free cash flow projection of $425 million. Our capital strategy assumptions, however, have been augmented in places to take advantage of our stronger, early year cash position. We still plan to retire approximately $100 million of our long-term debt obligations, as we repaid $9 million in the first quarter and $60 million already in April. We repurchased $16 million of shares in the quarter, and plan to continue our systematic approach throughout the year. We anticipate spending $250 million to $270 million on capital expenditures in the year to support, and in some cases accelerate growth initiatives throughout our organization. This slightly increased spending will be directed to new product investments in all of our businesses, cost reduction and automation projects, and select additional capacity initiatives to support demand and future growth, primarily in the Propulsion business. We are also raising our dividend, for the ninth straight year, to $0.335 a share, or a 24% increase, as our strong cash position enables us to raise our dividend earlier in the year than usual, and keep our payout ratio close to our target 20% to 25% range, and continue to provide strong returns to our shareholders. Finally, we've had a busy start to the year with M&A activity, primarily in expanding Freedom Boat Club as Dave discussed earlier. Completed deals to-date will have an immaterial impact on 2021 results, but we remain active in several areas including Parts and Accessories, Freedom and other initiatives and intend to close additional deals throughout the year. I will now turn the call back over to Dave to continue our outlook comments.

Thanks Ryan. As we discussed on our January call, we felt that 2021 was setting up to be an outstanding year for all of our businesses and the first quarter did not disappoint. The combination of robust consumer demand during the quarter and solid operational execution by our businesses has us squarely on track to deliver against our operating and strategic priorities. Our top priority for the Propulsion segment continues to be satisfying outboard engine demand from new and existing OEM customers and expanding market share, especially in the dealer, saltwater, repower and international channels. We are continuing to invest heavily in new product introductions and industry-leading propulsion solutions that we project will enable top-line and earnings growth far into the future. Our Parts and Accessories segment remains focused on optimizing its global operating model to leverage its distribution and position of product strength in the areas of advanced battery technology, digital systems, and connected products in support of our strategy. We will continue to focus our M&A activity in this area as we look for opportunities to further build out our technology and systems portfolio. The Boat segment will build on its first quarter successes by continuing to focus on operational excellence, improving operating margins, launching new products, executing capacity expansion plans, and refilling pipelines in a very robust retail environment. Lastly, we remain keenly focused on accelerating the Company's strategy, building on our connectivity and shared access initiatives, but also in the areas of autonomy, where we recently announced a new partnership with Carnegie Robotics, and in marine electrification, where we plan a portfolio of new products. We will also continue to advance our ESG and DEI strategies across the company. But that's all I'm going to say about our strategy on today's call because we will cover this in much more depth on our Virtual Investor Day. It's been more than a year since we have provided you with a comprehensive update on the Company's strategy, so I welcome you to view Brunswick's Next Wave, virtual investor event on May 10th. As we have done with past investor days, we have gathered our business leaders to provide you with an update to our 2022 strategy that was originally presented in February of 2020 in Miami, as well as to discuss certain longer-term initiatives that will grow and differentiate Brunswick through the next decade. The pre-recorded content will be available Monday morning May 10th on brunswick.com, and it will be available to view at your leisure all at once or in bite-size chunks by topic. We will also hold a Q&A session for investors to ask questions of our management team on Monday, May 17th at noon Central Daylight Time. All of this information will be made available in a press release early next week. Just a reminder that while we will not be providing a full financial update during this event, Ryan will be providing an abbreviated update on our 2022 financial targets, which will include further details regarding the substantial increase of our 2022 EPS target to between $8.25 and $8.75 per share as announced today. Finally, I want to once again offer heartfelt thanks to our global employee population for all their dedication, effort, and sacrifices during what is still a challenging time for our families and communities. Your hard work has enabled us to seamlessly execute our strategic plan and significantly outpace our initial growth and profit expectations. We will now open the line for questions.

Thank you everyone. We will now begin our question-and-answer session. Our first question comes from James Hardiman with Wedbush Securities. Please go ahead with your question.

Hey, good morning. So obviously, a great quarter. I guess, my first question is how, right? You talked about production increases here in 2021. But it seems like most of that physical expansion is slated to happen later in the year and so if I just look at fourth quarter sales where you did about $1.1 billion. You did $1.4 billion this quarter, so north of 20% higher. How are you able to pull that off is sort of question number one.

Hi James, it's Dave here. I think there are several factors at play. At the end of last year, even though we had made significant progress, we were still in the process of adding shifts and advancing other manufacturing initiatives. This began to show across all our businesses in Q1. We were hiring, and in fact, we brought on 1,000 new employees in Q1. Having these team members has been a tremendous advantage. It's not easy to achieve this in a tight labor market, but our talent teams have successfully done it. We’ve integrated these hires across all our businesses. Mercury has increased production with extra shifts, and BG has produced more boats than we initially expected. What you witnessed in Q4 was still an ongoing transition that has successfully evolved into Q1. Through hard work, we’ve managed to overcome many challenges encountered across various sectors, including supply chain and transportation issues. Fortunately, these challenges have had minimal impact on our production, for which we are extremely grateful.

The margin expansion has been very encouraging. However, the key question for many investors is how sustainable this is. We've observed this trend among several successful companies lately. I wonder if you could address this by breaking it down into components, such as what is unique to the current environment, promotional benefits, and the sustainable margin improvements you've achieved. How should we consider the margin power beyond the pandemic and the situation of 2022?

Good morning, James. It's Ryan. You'll get more details on 2022 at the Investor Day on May 10th. We believe that margins and growth are sustainable well into 2022 and beyond. Increased volume is a strong indicator for us right now, and as we continue to expand across all segments, it's aiding absorption and other aspects within our facilities. We've been focused on keeping fixed costs low across our entire footprint for the past several years, and as our top-line and earnings grow, we are not significantly increasing fixed costs in the system. I believe this trend will persist. Additionally, we experience some mix benefits that vary from quarter to quarter, and from the first half to the second half, but we are seeing a favorable sales mix across most of our business units. There are some potential challenges, like cost and material inflation and tariffs, which have been somewhat detrimental. However, these factors are not reflected in our results. It's a specific, unique situation driven by the pandemic or related issues. If you revisit our initial plan from February last year, this is where we envisioned being. While the path taken to reach this point may not have been conventional, we remain confident that margins will continue to grow for us.

I would add, James, that every new product we are introducing, regardless of the category, is being launched with a higher gross margin. All the new products we have discussed are coming in at higher gross margins, and we have not reduced our focus on manufacturing efficiency and automation initiatives that are key to our strategy and are progressively lowering costs each year. While we may face some short-term challenges due to elevated transportation pricing and other factors, these will improve over time. However, the fixed cost reductions we have implemented, along with the increased automation and other efficiency measures we are consistently applying month after month, will not diminish.

Thank you. Our next question comes from Fred Wightman with Wolfe Research. Please proceed with your question.

Hey, guys. Thanks for taking the question. You alluded to continued retail momentum a few different times on the call. I think, Ryan, you mentioned some strong demand out of Northern states recently due to weather, but could you just put a finer point on what you're seeing at retail as we move through April and you start to lap some of those tougher prior year comparisons?

Yes. Hi, it's David and Ryan can add. Retail is just very, very strong, and our brands are stronger than retail, whether you look at boats or engines or Parts and Accessories. So we're accretive to retail performance, which, as you know, is up by both SSI data and other things in the mid-30%, I think, in the first quarter. To some insight into April, April is very strong. So we are not seeing any pullback in the trends that we've continued to see through there. The season did start earlier than last year for a number of reasons, I think, particularly in the northern markets, weather is generally warmer; ice was off Northern lakes in Canada and the Upper Midwest. And people were just desperate to get their boats in the water. So the season has really started in a lot of cases in northern markets, four to six weeks earlier than last year, which means, obviously, a lot of pull for Parts and Accessories. Great, great, great for our dealers, but also great for us in terms of accelerating our Parts and Accessories business and causing people to continue to purchase at record rates on boats and engines and other things. Nobody, no OEM, no dealer wants to get caught without product right now. So it is driving tremendous momentum for us.

And maybe just to shift to the wholesale side. You mentioned that 95% of your capacity is sort of earmarked already for this year. Can you give us a sense for what that looks like as we look ahead to 2022, just given the fact that you think it's going to be a 2023 timeline until we start to make meaningful progress on the dealer inventory side?

Yes, we have observed that for some of our brands, a significant number of wholesale slots for 2022 have already been sold, especially for the premium brands. Currently, our premium brands are experiencing very low inventory levels, which are significantly below the averages we have previously mentioned. Notably, at the recent Palm Beach Boat Show, our unit sales were up 100% compared to 2019. There was no show in 2020, but our revenues increased by 200%. We essentially more than tripled our revenues, mainly due to customers purchasing larger boats. I believe we sold four or five Whalers at that one show. Clearly, people are willing to wait for delivery of these products well into 2022.

We are actively executing the wholesale production plan that we outlined in January. Despite some supply challenges, our Boat businesses are putting in significant effort. This year, we expect to wholesale and produce over 38,000 units, with additional units planned for next year to reach the low 40s in 2023. We believe this will help us address some of the inventory shortages.

Thank you. Our next question comes from Scott Stember with C.L. King & Associates. Please proceed with your question.

My questions are focused on Freedom Boat Club, especially after the significant news this quarter regarding purchases in larger markets. Could you outline the overall strategy? Would you prefer to own all these locations across the country for the reasons you mentioned in your opening remarks? Additionally, can you discuss some of the easy opportunities for enhancing these newer models in the fleets with your engines and other features? Have you noticed any early indications that customers who rented boats have chosen to buy a Brunswick brand because they fell in love with the boating lifestyle? Thank you.

Thank you for the question. We have decided to repurchase territories where we see significant potential compared to the current number of clubs and members. However, we don’t plan to repurchase every region, as many of our franchisees are effectively maximizing the potential of their territories. For instance, in markets like Chicago and New York, including Long Island and Manhattan, the potential for growth far exceeds the current membership and boat numbers. This makes it challenging for franchisees to accelerate growth as quickly as we would like. Therefore, our approach will be more selective rather than universal. Regarding the integration of the Freedom fleet with Brunswick boats and Mercury engines, it is progressing very well. We have either delivered or ordered about 1,500 Brunswick boats for Freedom, which is a significant increase from nearly nothing at mid-2019. Additionally, each boat added to the Freedom fleet can serve 10 to 12 members who pay their monthly membership dues for two to three years. We also have the opportunity, through Boateka, to resell these boats and capture margin on that resale. As we continue to develop Freedom and enhance our resale capabilities, the margin structure for Freedom becomes highly appealing to us.

I would like to add that, much like the Parts and Accessories business, this area generates recurring earnings and revenue whether we own the assets or operate through a franchise model. Members are consistently engaging with the club, leading to ongoing sales of Parts and Accessories, as well as boats and engines. As Dave mentioned, we are somewhat indifferent to the model as the annuity-based revenue continues to grow at an increased margin rate for the company overall.

Regarding your question about customers purchasing the Brunswick brand, we are indeed observing this trend. I don't have specific data to share at the moment. However, I recently came across an email from someone who joined Freedom and enjoyed the Sea Ray so much that they decided to buy one. While I don’t want to rely solely on anecdotes right now, we will work on gathering more information for you.

Thank you. Our next question comes from Brett Andress with KeyBanc Capital. Please proceed with your question.

Good morning, everyone. I have a question regarding the marine market outlook, which appears to be in the mid- to high-single digits. It seems like the industry has never entered a selling season with inventories this low, and since retail is quite seasonal, do you have any expectations about whether the industry can meet that demand? Or do you anticipate facing challenges due to the low inventories?

We believe that the unconstrained retail market is growing at double-digit rates. However, we anticipate some challenges from supply, and by the end of this year, our inventory levels are expected to be lower. We are considering these supply constraints in our mid-to-high estimates. While we don’t have complete visibility into the entire market, we do think the potential for the unconstrained market is greater.

Got it. Okay. No, that's very helpful and then a question on capital deployment. So free cash flow guide is up, debt repayment buybacks kept unchanged. Should we interpret that as maybe placing a higher emphasis on larger M&A in the near term? And then separately, to the extent that you want to share, have you made any changes to the M&A contribution assumptions in that 2022 target you gave us today?

Good morning, Brett. I anticipated that question. I’ll address them in reverse order. There is no change in our assumption for the $8.25 to $8.75 target. This outlook includes spending about $100 million this year and next on mergers and acquisitions, with a relatively small contribution of a few cents to next year's earnings per share. This is how our model is structured. Regarding capital deployment, I don't believe it alters our plans for the year. As you noticed, we didn’t raise capital expenditures slightly, which is significant. We have some programs that we can expedite to support our growth, which is essential. Our plans for share repurchases and debt repayment are on track. Of course, share repurchases can vary based on our stock price and the broader market conditions. However, we believe it’s wise to be active in the market for share repurchases, and we will continue that practice. The increase in dividends is also noteworthy. We made a substantial leap in that regard earlier this year. Typically, we raise dividends in October, but given our strong cash flow, we felt it was appropriate to do so earlier. We can adapt our balance sheet quickly if we are considering a large M&A deal. We have no issues securing funding; our gross leverage is around one times, with net leverage much lower, so we can easily adjust our balance sheet for a larger transaction.

Thank you. Our next question comes from Mike Swartz with Truist. Please proceed with your question.

Hey, guys. Good morning. I just wanted to touch on guidance and specifically the segment guidance that you provided and updated this morning. You're holding your boat revenue guidance steady versus prior, but your Propulsion, Parts and Accessories are up materially. So maybe help us understand what's maybe holding back the boat side of it? Or conversely, why maybe you were a bit cautious on that to begin the year?

Good morning, Michael. It's quite simple. Our guidance assumed that we would fully execute our production plan, and that remains unchanged. We began the year with a target of 38,000 boats at wholesale, and we're still following that path. I see this not as a negative but rather as a significant positive, as we continue to believe we can maximize production and generate the revenue we expected despite some challenges mentioned by both us and the industry. Regarding Propulsion and Parts & Accessories, Propulsion has gained market share and has ramped up production faster than we anticipated. The mix has also been strong, with increased sales to international customers. In the Parts and Accessories segment, greater boat usage at the end of last year and into this year, especially in northern areas where boating season starts earlier, has positively impacted our aftermarket business. These trends we're observing at the beginning of the year will likely reflect our expectations for the rest of the year.

And Mike, I want to emphasize that in Propulsion, while we have announced the addition of new customers and increased market share, that trend is continuing into the first quarter. I believe we have around six more customers to add. Although we've discussed the V-12 extensively, it's only just starting production, and it represents a high-margin product for us. Therefore, with the influx of new customers, the transition of the model year allowing for increased market share, and the introduction of more propulsion products, along with the V-12 launching in the latter part of the year, there's a lot happening in Propulsion.

Thank you. Our next question comes from Joe Altobello with Raymond James. Please proceed with your question.

Thanks. Hey, guys. Good morning. So just staying on the engine side for a second. You guys have been very explicit about the pipeline refill opportunity in boats, but I think less so on the engine side. Are there any ways you can contextualize for us what that opportunity is, at least compared to what it is on the boat side, for example?

Joe, I'm having a bit of difficulty hearing you. Was this about a pipeline fill for engines?

Exactly. And how it compares to the boat side.

Yes, it's somewhat different. I can tell you that the engines at our OEM partners and dealers are very low, which is expected given the strong demand. However, we don't view it in terms of weeks on hand like you might for other products, due to the flexible nature of where they are and how they are sold. What I can say is that the capacity we established back in 2019 and 2020 is really helping us maximize retail pull-through and ensure that we are getting as many engines as possible into our partners' hands. It's not as critical as it may seem because engines can be manufactured a bit quicker than inventory can be picked up in the boat segment. For instance, there are no model years to consider, among other factors. Nevertheless, the inventory of engines still remains relatively thin in the field.

Understood. And just maybe a second follow-up in terms of pricing. How are you guys thinking about pricing for model year 2022? It doesn't seem like there's much pushback from either dealers or customers from a pricing standpoint. So could we see a higher than typical bump in ASPs to offset some of the cost pressures that you guys are seeing?

We believe that in all our businesses, we have the ability to price at least to cover inflation. And obviously, we're seeing some short-term pressures on commodities and transportation and other things. I think in our engine business, we already price at a premium to our competition. As we think about pricing there, we're continuing to accelerate market share and a point of market share is very valuable to us, not just as we've noted, because of the additional engine sales, but because of the 25-year Parts and Accessories annuity. So I think that we will continue to use pricing as a lever to cover inflation and I think the market is just fine with that. But that's our objective at the moment.

Thank you. Our next question comes from Anna Glaessgen with Jefferies. Please proceed with your question.

Hi, good morning. Just one question for me. Thanks for providing some color on the demographic profile of boat buyers in 2020 and as we think about lapping a surge in younger buyers, could you provide some perspective on how you see the average age shaking out in 2021 and beyond? Anecdotally, are dealers continuing to report younger buyers coming to the market? Or do you expect somewhat of a reversion to prior levels? Thanks.

Thank you for the question. We are very excited about the change in the demographic profile, which is encouraging for us and the industry as a whole. We have gathered insights from our surveys and the online communities we have established, and we will discuss this in more detail on Investor Day. From our findings, we know that last year's new boat buyers had a great first season on the water, with over 90% rating their experience as four stars or higher out of five. This indicates that new entrants are enjoying their time. We also recognize that trends related to COVID, like flexible working, are positively influencing demographics. People in their prime working age now have more flexibility to engage in various activities throughout the week, and we've even noticed individuals working from their boats due to this added flexibility. We will keep you updated on demographic trends, and everything we are currently observing continues to support this positive trend.

And probably one other thought and kudos to our IT and our digital marketing teams, we are investing in areas that enable us to reach a younger consumer and frankly, enable them to want to buy our products. You can look online to new websites for Whaler, for Lund, and it's just easier. You can design your product and I think investing there and finding a way to ensure that the younger consumer doesn't just have to go to a dealership and start their process there, but can start their process in their living room and finish it at the dealer. I think that's really important to continuing to get the younger boaters in.

That's a good point. One of the other things, and I'm advertising for the May 10th, Investor Day, is, you will see some more there about new boats and new boat brands that we are bringing to market specifically to address that younger buyer.

Thank you. Our next question comes from Eric Wold with B. Riley. Please proceed with your question.

Thank you guys. Yes, good morning. Just a couple of questions. I guess, one on going back to Freedom Boat Club, less on the acquisition of existing franchisees or areas. What's the biggest hurdle to getting new locations opening? Are you seeing pressure on finding space in marinas and spot to set up shop with the kind of the increase in boating participation? And how does the kind of lack of inventory and kind of demand overhang plan to that as well for boat availability?

Yes, good question. We still believe there are plenty of existing slips available for us to expand with Freedom Boat Club locations. We are not currently facing any significant overall limitations on slip availability. While boat availability remains somewhat tight as we sell our own brands into Freedom, we can manage this situation. We expect to continue rapid growth for Freedom, and we've also set up a team in Europe to expand more aggressively in that market. There are no immediate constraints, and we are committed to building this business model quickly.

Thank you. And then last question for Boateka, how much of the growth of that is going to come from the boats coming offline from Freedom Boat Club versus, I guess, traditional used boats from kind of regular boaters out there, non-Freedom Boat club and then is that a business that you could foresee growing inorganically as well to move nationwide? Or is that going to be purely organic?

Boateka is really kind of core business model, if you like, is taking boats out of not just Freedom but also boats that we sell to some of the shared access partners. We do sell boats into other kind of shared access operations like rentals that we can have returned and resell through the Boateka system. Certainly, as Freedom expands, Boateka will need more locations, but we're not currently planning M&A around Boateka. We'll continue to build it out organically. As we continue to find out more ourselves about the nuances of the Freedom Boat market.

Thank you. There are no further questions at this time. I would like to turn the call back to Dave for some concluding remarks.

Okay. Thank you. Well, first of all, thank you all very much for joining us. We are very, very excited about the strength of the market, but even more excited about our new products. Our market share increases, our operating performance, all of those are secular trends that are very, very favorable for our business and allow us to plan and build into the future. It is wonderful to see the new demographic entering boating and to see us over-indexing on that new demographic. That says we have the right strategy in place, and you'll continue to see more about that. We're very excited about the May 10th, Investor Day. A lot of preparation gone into that, and we'll really be pulling back the curtain on some initiatives that you haven't necessarily seen before and expanding on some that you might be aware of, including a lot more detail on our strategy, our planned portfolio of electric products and other parts of our strategy, including the building out of Freedom and other shared access model. So please join us for that. It will be a very exciting event and give you a much better picture of what lies ahead in the coming years for Brunswick. Thank you all for joining.

Ladies and gentlemen, this concludes today's web conference. You may now disconnect your lines at this time. Thank you for your participation and have a great day.