Brunswick Corp Q2 FY2022 Earnings Call

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 the 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 section of the unaudited consolidated financial statements accompanying today's results. I will now turn the call over to Dave.

Thanks, Neha, and good morning, everyone. In the second quarter, we delivered our first ever quarter with more than $300 million of adjusted operating earnings and together with record revenue and EPS continued our trend of exceptional performance in the challenging macroeconomic landscape. We maintained our strong focus on cost control and operational efficiencies while continuing to invest in new capacity, new product programs and ACES initiatives necessary to fuel future growth and market share gains. All our divisions contributed to the strong performance while continuing to actively manage our supply chain and negotiate macro volatility. Consumer demand for our products remains strong as we work through a period of tougher year-over-year retail comparisons versus a particularly strong first half of 2021 while being impacted by continued low field inventory and some enduring supply chain disruptions. Global boat field inventory levels increased in the quarter over the same prior year period although they remained 55% lower versus the same time in 2019. This is notable as the 2022 retail season had a slower start in some parts of the US and Canada while gaining momentum in the latter part of the quarter. Our P&A business backlogs remain elevated. Overall, our production remains on track and the percentage of our boat production that is already retail sold continues to be high, especially for our fiberglass brands with no evidence of wholesale cancellations across the enterprise. As the economic outlook continues to create overall market and sector dislocation, we executed $140 million of share repurchases in the second quarter bringing our year-to-date share repurchases to $220 million. And we plan to continue an aggressive repurchase schedule in the back half of the year. Prior to discussing our segment performance for the quarter, let me spend a few minutes updating our view on external economic factors, consumer activity and engagement. First, we're seeing some abatement in supply chain constraints and inflation from recent peaks in a number of areas, resulting in more efficient manufacturing across our footprint. While our businesses continue to experience elevated inflation, any moderation occurring in the back half of the year will factor into our pricing strategies. From a consumer standpoint, we continue to see limited signs of fuel prices deterring boating. Even as the world has opened up versus the more pandemic impact in 2021, boating participation remains strong and little changed from robust COVID levels. Specific to the US market, population migration towards warmer regions since 2020, approximately towards has increased with six of the 11 largest boating markets reporting net household growth. Web search interest for boats and boat club related purchases and activities has trended up coming out of Q2, and most recently, searches for boat club are above prior year. Lastly, our internal consumer insights reflect healthy traffic and boat purchase consideration similar to prior year. As I turn to the performance highlights of our segments during the second quarter, let me note each of our segments delivered sequential quarterly top line improvement. Our Propulsion business continues to deliver outstanding results with 13% top line growth versus second quarter 2021 enabled by increased production and customer demand. Mercury Marine continues to expand outboard propulsion and retail market share around the globe, gaining 140 basis points over the past 24 months, including 630 basis points in greater than 200-horsepower outboard engines in the US. As the additional outboard engine capacity at the Fond du Lac, Wisconsin facility comes online towards the end of 2022 and supply constraints are alleviated, we expect further global market share gains. Our parts and accessories businesses delivered strong sales growth as benefits from acquisitions completed in 2021, steady engine P&A sales in the US and strong OEM sales from our Advanced Systems Group helped to offset headwinds related to early quarter poor weather in certain northern locations, supply chain constraints in our distribution businesses and retailers returning to more normal stocking patterns. Segment earnings were flat against an extremely strong second quarter 2021, but are far ahead of second quarter 2019 with boating participation remaining elevated and continuing to drive our aftermarket businesses. Our boat business posted robust top line growth in the quarter with double-digit operating margins, which increased sequentially for the third consecutive quarter. Each product category delivered strong top line growth with our aluminum fishing and recreational fiberglass brands also significantly expanding operating margins. Finally, Freedom Boat Club continues on its growth trajectory in the US and Europe and now has more than 360 locations reaching 50,000 membership agreements covering 80,000 members network-wide and a fleet size of nearly 5,000 boats, all while generating exceptionally strong synergy sales across our marine portfolio. On a same-store basis, Freedom membership growth in the quarter was 30% higher than in the same quarter in 2021. Next, I'd like to review the sales performance of our business by region on a constant currency basis, excluding acquisitions. In the second quarter, nearly all regions posted substantial sales growth versus second quarter 2021, with Canada and Europe delivering strong sales growth in every business unit. Overall, international sales were up 7% versus the prior year quarter, and US sales grew 14%. Sales in Asia Pacific were down slightly against extremely strong 2021 comparisons, although nearly doubling since pre-pandemic levels in 2019. A comment on propulsion of market share where we have focused our recent commentary on our continuing share gains in the US over the past five years, especially in high horsepower categories. The same share gains are happening across the globe. Our data indicates we are taking share in each region with significant runway still to conquest, enabled by the additional capacity coming online by the end of this year. From an industry view, continued low product inventory remains a constraint on retail sales growth versus strong 2021 comparisons. The main powerboat segment was down 16% versus the first half of 2021, but just slightly down versus 2019. In addition, preliminary June data reflects a narrowing of the US retail gap versus prior year as trends improved through the quarter. Outboard engine industry data is more favorable as the first half of 2022 was flat to the first half of last year and up 10% versus 2019. Brunswick's boat retail performance in the second quarter was broadly consistent with the overall market performance with outperformance in recreational fiberglass products and pontoons. In our aluminum fish boat brands, we have focused on margin maintenance and expansion and have shifted production to higher-margin product lines at the recent expense of some unit share of value aluminum product. As important, Mercury continues to maintain its very strong market share in all these product categories. Among 75-horsepower and greater outboard engines, Mercury has increased US market share in each of the last five years, gaining almost 600 basis points. I'll now turn the call over to Ryan for additional comments on our financial performance.

Thanks, Dave. Good morning, everyone. Brunswick delivered yet another fantastic quarter with record sales, operating earnings and EPS for any quarter on record. When compared to prior year, second quarter net sales were up 18% with adjusted operating margins of 16.4%. Operating earnings on an as-adjusted basis increased by 13%, and adjusted EPS of $2.82 increased by 12%. Sales in each segment benefited from price actions taken in the last 12 months, partially offset by unfavorable changes in foreign currency exchange rates and supply chain inefficiencies. While each segment's operating earnings were also impacted by continued material, labor and freight inflationary pressures and spending on growth-related initiatives. Note that changes in foreign currency exchange rates were a mid-double-digit million dollar earnings headwind in the quarter, more than double the anticipated impact. On a year-to-date basis, Brunswick has also delivered record results, including over $3.5 billion of net sales, $568 million of operating earnings and $5.35 of diluted EPS, which is higher than any previous full year in Brunswick's history aside from last year. You'll note that we have shown comparisons to 2019 on these two slides to highlight the strong growth CAGRs over the last three years and the record performance of the business versus the second quarter of last year, which was the previous best quarter in company history. Turning to our segments. Our Propulsion business delivered yet another quarter of outstanding results with record top line, earnings and operating margins. Revenue increased 13% versus the second quarter of 2021 as continued strong global demand for all product categories resulted in increased sales volume, which continues to be enabled by increased production levels. Mercury also enacted certain price increases in May, primarily targeting 175-horsepower and above outboard categories. Operating margins were up 50 basis points and operating earnings up 16%, each enabled by increased sales and lower operating expenses, partially offset by investments in capacity and product development. As a reminder, the previously announced capacity expansion at the Fond du Lac, Wisconsin facility, which will add significant capacity for high horsepower outboard engine lineup remains on schedule for completion in the fourth quarter of this year. This expansion, which will add more than 50% capacity and 175-horsepower and higher categories, will be critical in driving future top line and earnings growth together with market share gains. Our parts and accessories businesses saw a 19% increase in sales due in large part to the 2021 acquisitions of Navico, RELiON and SemahTronix. Excluding the impact from acquisitions, organic P&A revenues were down 4% against a very tough 2021 comparison, but were up 29% versus the second quarter of 2019. US engine P&A and core ASG sales were up quarter-over-quarter, while sales in our lower-margin distribution businesses were negatively impacted by third-party product availability and aftermarket product businesses outside the US. Supply chain constraints were particularly acute in international regions with US sales also impacted by a slower start to the boating season in northern markets due to unfavorable weather conditions. Operating earnings were flat against Q2 of 2021, given all the factors previously mentioned, with benefits from acquisitions being offset by outsized material and freight inflation. However, earnings without any benefit from acquisitions were still up approximately 20% versus the second quarter of 2019. Our Boat segment had a fantastic quarter, delivering strong top line and earnings together with double-digit operating margins despite continued supply chain disruption and cost inflation. The Boat segment reported a 27% increase in net sales due to increased sales volumes to dealers. Segment operating earnings and margin growth were enabled by the increased sales volumes, together with operational efficiencies and positive mix, partially offset by inefficiencies resulting from supply chain disruptions, inflation pressures, and the production ramp-up of the new Boston Whaler Flagler facility, which will be substantially complete by the end of the third quarter. Freedom Boat Club, which is included in business acceleration, contributed approximately 6% of the Boat segment's revenue during the quarter, increased from first quarter 2022 as Freedom benefited from acquisitions of both third parties and franchises. Turning to pipelines, our production continued to enable more wholesale boats to be sold in the second quarter of 2022 than we did in the second quarter of 2021. However, supply chain inefficiencies continue to result in delayed components and ultimately the deferral of shipping certain nearly completed boats to subsequent quarters. As of the end of the second quarter, there were approximately 10,000 units in dealer pipeline inventories around the world, still down 55% from the halfway point in 2019. This translates to just over 16 weeks of inventory on hand measured on a trailing 12-month basis, which is significantly lower than where inventories typically stand at this point of the year. The inventory position in the US is even lower with just over 5,000 units available or 12 weeks on hand. Inventory levels also differ by product category with fiberglass products, including Boston Whaler and Sea Ray remaining at significantly low pipeline levels due to continued high percentage of retail sold products coming out of our manufacturing facilities. We anticipate end-of-the-year pipelines to remain thousands of units and many weeks on hand below historical averages. Moving to our outlook for the remainder of the year. Our continued operating outperformance puts us in a position to raise the bottom end of our full year EPS guidance, even after absorbing the approximately $0.18 of additional anticipated unfavorable foreign currency exchange rate impact in the second half of the year. In addition, our accelerated and additive share repurchase strategy, which I'll discuss more on the following slide, continues to provide incremental benefits for the year. Finally, our focus on production output and controlling operating expenses is anticipated to help minimize the impact of continued challenging inflationary conditions. The result is a narrowed full year revenue guidance of $6.9 billion to $7.1 billion and adjusted diluted EPS of between $10 and $10.30. I'll finish my comments this morning by highlighting certain P&L, cash flow and capital strategy assumptions that have changed versus our prior guidance. As mentioned on the previous slide, we now anticipate a $35 million to $40 million full year earnings headwind due to changes in foreign exchange rates, primarily related to the strong US dollar. In addition, our anticipated earnings impact due to tariffs has improved by $10 million but still resulted in an estimated $50 million headwind, primarily due to certain components used in outboard engine manufacturing, exceeding 75 horsepower, all of which are manufactured in the United States still being subject to the tariffs. Finally, we continue to plan on taking advantage of the current market and sector value dislocation by increasing our planned share repurchases for the year. We have repurchased $220 million of shares year-to-date and anticipate repurchasing $400 million of shares for the year, an increase of $100 million from our previous estimate. This will result in our average diluted shares outstanding for the year to decrease to between 75 million and 75.5 million shares. Our operating performance, together with continued capital strategy execution, will result in an all-time high of $500 million of capital returned to shareholders in 2022 through share repurchases and dividends alone. I will now turn the call back to Dave for concluding remarks.

Thanks, Ryan. I'm delighted to share some recent highlights from across the company. During Q2, we launched the all-new Sea Ray SLX 260, which is designed by an all-female design team and is the first sport boat to showcase the new Sea Ray design language. The model has been tremendously well received in the marketplace. Mercury continues to advance market share and deliver new products with the recent announcement of the next generation of 25- and 30-horsepower FourStroke outboards. I'll speak more about both of these in a moment. As I mentioned earlier, Freedom Boat Club has accelerated at a rapid pace. We now have more than 360 global locations and 80,000 members globally. Integration of our recent franchise territory acquisitions is proceeding well, including the Tampa Bay operation and territory, the largest territory in the Freedom network. We advanced our sustainability initiatives with the completion of the installation of an array of photovoltaic solar panels in Portugal. Additionally, we recently announced a partnership between Mercury Marine and Alliant Energy to build a 5-megawatt 32-acre solar array in Eastern Fond du Lac County. Construction on this project is anticipated to start in spring 2023. We're very excited about the launch and tremendous momentum of All Blue Planet, a global Brunswick initiative focused on inspiring our communities, particularly those who are underrepresented on the water to engage with and enjoy the restorative power of being on and around water. The recent launch events generated more than 2.5 million impressions. And in June, we had four of our fantastic women leaders selected to the Boating Industry magazine 2022 list of Women Making Waves, which celebrates women making outstanding contributions to the recreational marine industry. I'm going to finish this morning discussing new products, which is always one of my favorite subjects. We have an exceptionally busy second half on new product launches across the enterprise with this slide capturing only a few that I'm able to discuss at this stage. In addition to the new Sea Ray SLX 260 outboard and sterndrive that I discussed earlier, we'll be launching exciting new models and technologies across all our boat brands with the first new boat model coming from Boston Whaler in early August and many more to follow. Two weeks ago, Mercury introduced its next generation of 25- and 30-horsepower FourStroke outboards, engineered from the ground up to be lighter, faster and easier to operate and maintain. These models come standard with digital controls and connectivity, allowing boaters to connect to the most advanced digital gauges in the industry and to our mobile applications, demonstrating how we are again migrating advanced technology initially introduced on larger products to benefit all segments. Mercury also continues to advance towards the commercial launch of its Avator line of electric outboards. And we'll launch some other very advanced and exciting new products by the end of the year. Finally, our Advanced Systems Group will soon be announcing new connectivity solutions and advances to its line of advanced energy storage and power distribution solutions for marine, RV and specialty vehicle applications. That's the end of our prepared remarks. Remember to mark Wednesday, November 16 on your calendars, as we've invited the investment community to our test facility at Lake X, outside Orlando, Florida for a day on the water to experience some of the new products and technologies I've just described. We'll now open the line for questions.

Thank you. And at this time we will be conducting a question-and-answer session. Our first question comes from Xian Siew with BNP Paribas. Please go ahead with your question.

Hi, guys. Thanks for taking my question. It's nice to see the improvement on a monthly basis for the retail numbers. Just wondering, has that continued into July? And then last time you talked about potentially a slow start to the season and weather kind of delaying some registration of units. I think given your own, you mentioned something like 4,000. Did that show up in the data, like the May or June? And how do we think about retail excluding those, I guess, shifted registrations?

Yeah. Thank you for your question. Good question. I think July is strong, actually, P&A is extremely robust in the first three weeks of the month. I think retail overall is trying to see why the trends would not continue. The only – it's somewhat difficult partway through a month to predict exactly how the month is going to end up because dealers tend to prioritize getting boats on the water and then the registrations come in the back half of the month, but nothing tells us anything materially different there. And the more kind of contemporary data that we get around P&A and on-water participation is very, very strong in July.

I would say also some leading indicators like financing applications are about the same as year-over-year versus last year.

Okay. Got it. Thanks. And then I wanted to ask about Freedom. You mentioned it's up to like 6% of the Boat division revenues. But I was wondering how much of the flywheel is kind of kicking in? Is there a way to frame like how much sales of like P&A and propulsion go into Freedom as well because that's the higher usage and the need for maintenance of that boat fleet? Just wondering how that is going.

Freedom is experiencing rapid organic growth, supported by the acquisitions made in 2021 and early this year, which are being integrated very effectively. One important metric to consider is the membership growth, which increased by 30% in the second quarter compared to last year, showcasing strong performance. Additionally, the sell-through rates for boats, engines, and parts and accessories are robust. However, due to boat availability issues, Brunswick Boat Group could only provide about one-third of the boats needed by Freedom this year, so the remainder was sourced from other manufacturers. In the future, we plan to increase the Brunswick share of the Freedom fleet to over 75%. This growth opportunity for Brunswick within the Freedom fleet serves as a buffer for retail operations. We also anticipate several thousand units for potential growth in Freedom that we must address while building up our inventory and supply for the rest of the year.

Thank you. And our next question comes from James Hardiman with Citi. Please state your question.

Good morning, everyone. Thank you for taking my call. I wanted to focus on the Boat segment, which clearly exceeded our expectations. First, could you provide a wholesale unit figure and whether production forecasts for the year have been adjusted? I’m trying to reconcile the improved unit shipments this quarter with the retail numbers, which seemed weaker than anticipated throughout the entire second quarter. It appears that despite stronger shipments, inventory levels have increased, as indicated by MarineMax and other dealers, suggesting that supply constraints are affecting retail sales.

Yes. I think Ryan should address this one. The situation with inventory has improved somewhat, and overall supply is better than it was. Although we are still facing some challenges, they are more isolated than before. Ryan will provide data on shipments. In terms of the supply-demand balance, supply is clearly dominating in fiberglass, especially in large fiberglass. Almost everything we produce is sold at retail. The northern markets, which are primarily aluminum markets, were the most impacted by the late summer. However, retail is catching up. We were able to increase inventory in those northern markets and aluminum fish, which typically has a shorter season. There is a certain divergence here. Overall, supply continues to significantly influence our retail, but this is not uniform across segments.

Yes. That's right. And James, good morning, James. our Q2 wholesale was just over 10,000 units, which actually is the first time we've gotten 10,000 units out in the quarter since the second quarter of 2018. So supply chain, still enduring issues throughout the lineup, but certainly better than it was year-over-year, and we were able to keep up a pretty nice production schedule. As Dave said, I think we've said on a couple of quarters in a row, we think it's critical to get inventory in the hands of our dealers to continue to spur retail. You're just not going to get a lot of walk-in customers should there not be any boats on the lot. So we feel like this is a really nice quarter across the boat group.

Yes. I think, James, one thing to think about on a kind of dealer basis, even in aluminum fish, you have five or six boats at a dealer. So they haven't to sell-through very high proportion of their inventory every month and every quarter. And they don't have the model diversity and availability of options necessarily that they would normally have.

Makes sense. And maybe by way of a follow-up, related question. I mean you've talked in the last couple of quarters about not getting back to normalized inventory levels until 2024. Is that still the case? And I think you know where I'm going with this question, right? I'm sure you've heard this developing bear case that the boat industry is essentially heading down the same path as RVs, which as you know, talked about this multiyear replenishment cycle, and that was ultimately pretty quickly condensed into a couple of quarters. So maybe speak to that idea.

I think we're in a very different situation compared to the RV industry. While I can't speak on behalf of the RV industry, we are keeping an eye on developments there. According to the data, even though we're down 55% globally compared to 2019 and more than 60% in the US, boat availability remains significantly limited. While we are building some inventory in certain segments, the pace is not fast enough to alleviate the issue. In the fiberglass segments, especially with pontoons, we are still anticipating a return to normalized pipelines around 2024. It's possible that segments like aluminum fishing boats could see some improvements earlier. However, our inventory levels are still quite low, so rebuilding will take time. Overall, our outlook remains consistent, though there are some nuances by segment.

Got it. Makes a lot of sense. Thanks, guys.

Our next question comes from Kevin Heenan with JPMorgan. Please go ahead.

Hi. Good morning, guys. Thanks for taking my question.

Hi, Kevin.

I just wanted to ask on the Propulsion segment, can you just talk about the visibility you have to the demand for the new production that's coming on later this year in terms of new OEMs lined up or lines of business that may have been underserved as well as the margin impact of that new product that's coming online? Thanks.

Thank you for your question. We have excellent visibility regarding the additional capacity at all levels, including OEMs. We are truly excited about bringing that capacity on board. Although we've focused our commentary primarily on the US market, we are rapidly gaining share in other regions as well. I wouldn't be surprised if we surpassed 50% market share in Canada soon. We are also making strong progress in all European markets, Australia, and New Zealand. This capacity has clear destinations not only in the US but also internationally. Overall, the margins are expected to be strong. We are not only meeting the demand from new and international OEMs, which typically have higher margins, but this will also enable us to pursue opportunities in the repower and commercial channels, which generally offer very strong margins. Every additional unit of capacity brings not only the value of the unit itself but also the incremental margin linked to those units. I am eagerly anticipating getting that capacity online, as it will be an exciting time for us.

Great. And if I could just quickly follow up on the P&A side. You said that July had improved. Do you see that business up on an organic basis in the third quarter? And any change to that? I think the full year outlook had embedded a mid- to high single-digit organic growth figure. How do you see that today? Thanks.

Yes, Kevin, I'll address this one. We expect organic growth in the latter half of the year. This quarter has been quite different from the last. The start of the quarter was slow due to weather conditions, but things picked up in June and July. When discussing P&A, it's important to consider the distinct segments. Engine P&A, which is our most profitable area, saw a slight increase in the US quarter-over-quarter despite the challenging weather. However, internationally, this segment faced more difficulties due to freight delays and supply chain issues. In the US, though, the business remains robust. The distribution segment has garnered a bit more attention than warranted; it's primarily a third-party distribution operation. We sell products on behalf of companies that use our global network, and several key customers faced challenges getting products to us during the quarter, impacting our ability to forward them. Despite this, the distribution business operates with nearly 10% margins, making it quite strong, though overall earnings from P&A remain modest. Additionally, the Advanced Systems Group saw strong performance, particularly in the OEM sector, and Navigo also continued to perform well. We have no concerns, as usage patterns are strong, and we anticipate solid results in the second half of the year.

That was a great commentary. One other thing is that big-box and online retailers have normalized their stocking patterns, and we have worked our way through that. Orders are flowing again from these retailers, and we saw that resolve itself at the end of the last quarter.

Thank you. And our next question comes from Anna Glaessgen with Jefferies. Please state your question.

Hi, good morning. Thanks for taking my question. Earlier in the script, you talked about how any moderation in the back half of the year from inflation would be factored into pricing strategies. Can you maybe expand on what you're saying here, maybe pricing increases would moderate if inflation moderates, just any help here.

Yes, certainly. So, yes, I mean, we essentially have been pricing to cover inflation for some time now. Obviously, we're a long-term player in the industry. We don't want to see prices increase and drive people out of boating or any other sector in which we participate. So, our plan is to continue to cover inflation, but with hopefully some moderation that will allow us to moderate pricing as well. We still plan to cover inflation now, and that is baked into our forecast.

Great. Thanks. And turning to Freedom, nice to see that membership growth was even higher than in the same quarter on a same-store basis. Can you talk about what you think the key drivers here is that there's greater expanded fleet? So units are able to better fulfill demand in their regions, or what do you think the key driver there is?

I believe that awareness plays a significant role. The larger Freedom gap has been widely covered in the media, and it's hard to recall a week without a news story featuring a Freedom location or the Freedom brand itself. This broad awareness has noticeably increased. People are becoming increasingly aware of the benefits of the Freedom model, especially those who have limited time but want to enjoy boating without the commitments associated with it. We're actively refining our model to ensure that as we expand, we maintain our service levels, enhance our brand, improve our boats, and diversify our fleets. We are taking all necessary steps to make the experience more appealing. Additionally, awareness is rising rapidly, as evidenced by this year's search trends for Boat Club, which surpassed last year's figures. Overall, across various metrics, our situation is looking quite positive.

Great. Thanks, David.

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

Hey, guys. Good morning. Could we just go back to the P&A segment? It looks like there's a pretty big margin improvement embedded in the full year outlook even though that full year number came down. Can you just explain sort of what's driving that and what gives you that confidence as we look into the back half?

Certainly. We have faced significant inflation in the first half of the year, which we have discussed in previous calls. We anticipate that some of this inflation will start to ease in the latter part of the year. Additionally, there are some mix factors at play. Generally, we expect volumes to be somewhat lower in the second half, which is a trend we observe year after year. That will also influence our results.

Some of our pricing was mid-May pricing. So we did not get the full impact of pricing in the quarter. We'll get the full impact as we go into Q3 and Q4.

The last thing I'd probably mention is Navico. Some of the cost synergies that we've been looking to put in will give a little bit more benefit in the back half and certainly into 2023 as well.

Okay. That's helpful. That makes sense. If we look at the repurchases, there was a mention in one of the releases or materials referring to similar levels in Q3 compared to Q2. This suggests that you will be close to the $400 million figure. Should we consider that as a minimum number? Also, how do you view repurchases in the current environment moving forward?

Yes. Fred, we've given ourselves plenty of flexibility as we continue to see the dislocation, not only in our own stock price, but in the sector itself. I would tell you that $400 million is certainly likely to happen. And we have the flexibility to go higher than that, should we do more in the third quarter, should valuations be appropriate for that.

Thank you. Our next question comes from Scott Stember with MKM Partners. Please go ahead.

Good morning and thanks for taking my questions.

Good morning.

Good morning.

David, you mentioned that there haven't been any wholesale cancellations in the boat segment and that consumer resilience is better than anticipated in your market. Could you discuss the trends you're observing? Are people shifting more towards cash purchases due to rising interest rates? If so, what percentage of purchases were made in cash this quarter?

I don't actually know the percentage of cash purchases this quarter. However, from what I observed in the first couple of weeks of July, financing applications this year appear to be quite similar to last year. It's clear that credit spreads have increased, and loan durations seem to have lengthened. For instance, I noticed dealerships offering 20-year plus loans on various products. People are likely adjusting their monthly payment options by considering longer loan periods. Most of the applicants we encounter are prime applicants, and the credit quality comparison between prime and non-prime this year remains similar to last year. There might be some individuals using cash, but that seems more common in the premium segments. Overall, we haven't seen significant changes. Despite rising credit spreads, people seem to be reasonably tolerant of them. If there's any shift, it may be seen in the value segments, but currently, things are holding up well, especially in the premium market.

Great. I have a follow-up question. Ryan, you mentioned shipping 10,000 units in the quarter. Are we still on track for the full year total of 40,000?

I think we’ll likely be just shy of that. We’ll probably be closer to 39,000. We did 94 in the first quarter or so, and just over 10 in the following period. The second half, as a reminder, has some calendar adjustments due to factory shutdowns and holidays in the fourth quarter, resulting in fewer production days. However, I believe that 38,000 to 39,000 is still a really good number.

Great. That’s all I have. Thank you.

Thank you.

Our next question comes from Mike Swartz with Truist Securities. Please state your question.

Hey guys, good morning. Just wanted to dig into the P&A business. I'm just a little confused with some of the commentary on the guidance, which you lowered. So I'm just wondering, I mean, the seasonal part of the business, the boating season started a little slower. I would assume most of that comes back later in the year. So, is the guidance reduction more on the distribution business, or I guess how should I think about that?

Yes, Mike, the situation is primarily focused on the distribution side. There is also some influence from the Navico side, particularly concerning the restocking patterns at retailers. Unfortunately, as you mentioned, there is a loss of P&A turnover due to the delayed season. If boats are not in the water until mid to late May instead of mid-April, it's unlikely to recover that season's turnover. The positive aspect is that P&A backlogs remain robust, although we are still experiencing some supply chain challenges. Overall, we are facing various minor issues, but it is not related to usage as we progress through the better weather this year.

Got you. Dave, you mentioned your aluminum fishing businesses and how you've directed more production towards premium models. Is this decision based on current consumer demand? Many of us have noticed that the lower end of the power sports truck recreational markets seems to be weakening more than the premium segment. Is this a response to that trend or part of a different strategic approach you are taking internally?

I have a few thoughts. I believe it's primarily a strategic decision. We are in a multiyear effort to improve our boat margins and aim to produce models with higher margins. Given the supply constraints we've faced, it makes more sense to use our limited resources on high-margin models rather than low-margin ones. This includes components like engines and windshield controls. Maintaining focus on high-margin models has been a key priority for us. I've also mentioned over the last three years that we won't strive for every unit of aluminum value product. We are committed to enhancing our boat margins over the long term. This segment of the business has many smaller competitors, some of whom are returning after being offline due to last year's supply issues, which were less stable. Therefore, we are proceeding cautiously to ensure we continue this margin improvement without overextending our limited supply chain resources in that area of the business.

And Mike, maybe one more to circle back. And while we were trying to avoid talking to FX too much from this call, but if I look at the back half of P&A sales, I mean, half of the impact of FX for the year is related to P&A. It's about half Propulsion and half P&A. That's $140 million sales impact. So right there is several points. So, still a number of factors, but we still showing good results regardless.

Our next question comes from David MacGregor with Longbow Research. Please state your question.

Good morning. This is Joe Nolan on for David MacGregor.

Hi, Joe.

Hi. I just had a sort of a follow-up to the prior question. With your focusing production on more of a premium product, can you just talk about the pace of orders and how this split between lower price boats versus premium products?

Yes, orders are very strong across all of our boat brands at the moment. There isn't a dealer who doesn't want more boat brands, regardless of the boat type. We are doing everything we can to meet that demand. Although supply constraints are more pronounced in the premium segment, our dealers currently have stock levels significantly below what is typical for this time of year, even in the Aluminum Fish segment. So, our orders are holding up very well.

Got it. Okay. Thanks for that. And then, just a quick follow-up. Mercury seems to just keep gaining share. Can you talk about some of the areas where you're having the greatest success, whether that's buying horsepower, type of boat or by geography? Thanks.

Everywhere is the answer at the moment. However, we particularly focus on higher horsepower, though we still do significant work across all segments. Recently, we introduced new 25 and 30-horsepower engines that incorporate some of the technology from our higher horsepower segments. This ensures our product line is strong from top to bottom. Importantly, we remain the only manufacturer with products exceeding 425 horsepower; we offer 450, 500, and 600 horsepower options, leaving us without competition at the upper end of the horsepower range. The demand for our high and mid-range horsepower remains very strong. We have established ourselves as a reliable supplier, which benefits us across the board. As we increase capacity, it is directed toward new OEMs, expanding our market share, and growing our presence in existing OEMs, as well as repower and international markets. Therefore, there is every reason to expect our share gains to accelerate with this increased capacity.

Great. Thanks for answering my questions.

Thank you.

Our next question comes from Joe Altobello with Raymond James. Please state your question.

Hi. Good morning. You mentioned that the new engine capacity will come online later this year, which is about 50% for your engines of 175 horsepower and above. I have two questions regarding this. First, what percentage of your engine sales does this represent in dollar terms? Second, when do you anticipate achieving optimal utilization levels with this new capacity?

Hi. Good morning, Joe. I'll take this one. 150-horsepower and above is about 60% of dollars. And below 150-horsepower is about 40%. So the swing factors are the always 150 which is obviously a big value. So you can imagine that this represents half or maybe a little bit less of the overall revenue of Mercury's propulsion business. And then in terms of full run rate, I mean, this is obviously not a light switch. You will see benefits in the fourth quarter. Certainly, I think as you look at the guidance, one of the reasons we took propulsion sales guidance up is the capacity coming online in the fourth quarter and it will continue really into next year. So, whether it is Q1 or Q2 of next year, that's probably when you'll see the full run rate. A bit of it does depend on supply chain and suppliers. And to this point, they've been great partners as they always are to Mercury. But that's when I think about the full run rate kind of mid next year.

Okay. It's very helpful. And maybe for Dave, just to clarify your comments earlier on the call on pricing. Are you saying we could see a moderation of price increases as cost inflation eases, or could we even see some rollback of recent price increases if input costs actually do come down?

No, I was saying, the former that we will see, hopefully, the opportunity to selectively moderate pricing. Obviously, inflation – price inflation has been higher than normal for some time now and we're very cognizant of that. I do not expect any price rollbacks. If we need to stimulate demand, we don't at the moment, but if we did, it would be more likely through promotional activity, not a rollback.

Okay. Thank you.

Thank you. Our next question comes from Craig Kennison with Baird. Please state your question.

Hey, thanks for squeezing me in here. Ryan, you made a point on FX, and that point is well taken in terms of effect on the income statement. I'm just curious, has there been an impact on the competitive dynamic in the Propulsion category?

We don't believe so, Craig. But obviously, over time, in any of our non-US competitors, their pricing is – it's their, obviously, their responsibility and we just can't comment on anything they do on pricing. But to date, not – we've not seen any material changes.

Great. Thanks for the call.

Thank you.

Thank you. And we have run out of time for questions today. At this time, we would like to turn the call back to Dave for some concluding remarks. Thank you.

Thank you very much. Thank you all for joining us today. I think this quarter once again demonstrates the evolution of our business and our ability to continue to perform strongly and advance our strategic initiatives even in the face of many headwinds. The improving retail data at the end of Q2 also demonstrates the resilience of the boating consumer. And I think in early July, we're seeing P&A rebound very nicely in a way that suggests that boating consumers is very, very active. We innovate on behalf of that consumer to offer the best boats, engines, experiences, alternative ways to participate. And we are very much looking forward to sharing more detail on that with the investment community in November this year when you will see, I expect, the most exciting array of new products that you have ever seen. So we will look forward to sharing that with you later in the year. Thank you.

And that concludes today's conference. All parties may disconnect. Have a great day.