Brunswick Corporation (BC) Q3 2019 Earnings Report, Transcript and Summary

Good morning, and welcome to the Brunswick Corporation's Third Quarter 2019 Earnings Conference Call. [Operator Instructions]. Today's meeting will be recorded. If you have any objections, you may disconnect at this time. I would now like to introduce Al Marchetti, Senior Director, Investor Relations.

Good morning, and thank you for joining us. On the call this morning are Dave Foulkes, Brunswick's CEO; Bill Metzger, CFO; and Ryan Gwillim, Vice President, Finance and Treasurer. Before we begin with our prepared remarks, I'd 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 the details on the factors to consider, please refer to our recent SEC filings and today's press release. All of these documents are available on our website at brunswick.com. During our presentation, we will be referring to certain non-GAAP financial information. Reconciliations of GAAP to non-GAAP financial measures are provided in the appendix to this presentation and the reconciliation sections of the consolidated financial statements accompanying today's results. As a reminder, on June 27, 2019, Brunswick completed the sale of its Fitness business. Starting with the second quarter of 2019, the historical and future results of this business are now reported as discontinued operations. Therefore, for all periods presented in this release, all figures and outlook statements incorporate this change and reflects continuing operations only, unless otherwise noted. I would now like to turn the call over to Dave.

Thank you, Al, and good morning, everyone. Our third quarter performance exceeded our expectations, reflecting the continued successful execution of our marine strategy and reinforcing the tremendous confidence we have in the future growth opportunities within each of our businesses. Both gross and operating margins expanded during the quarter despite anticipated reductions in sales, demonstrating the positive effect of our structural cost-reduction activities and improved sales mix as well as the strength of our overall business portfolio. The more favorable demand environment across the U.S. in the third quarter of 2019, along with planned lower wholesale shipment activity, resulted in better-than-expected pipeline inventory improvements across both boat and engine product lines. We ended the quarter with boats in the field already slightly below the prior year. We anticipate 2019 EPS as adjusted of approximately $4.25, which is the midpoint of our previous guidance. We are still confident in our 2020 adjusted EPS target of $5 to $5.50. We will provide additional color throughout the call on factors impacting these targets. I'll now provide some highlights on our segments and the overall marine market. For the Marine Engine segment, solid increases in both gross and operating margins continued the trend for the first half of the year despite lower revenue. Demand for higher horsepower outboard engines remains particularly strong, especially in the 175- to 300-horsepower V6 and V8 categories introduced in 2018. Sales of higher horsepower engines to the dealer channel are up significantly compared to the first 9 months of 2018, resulting in more robust repower activity. Capacity investments to satisfy existing demand and expand market share in this horsepower family remain on target for completion in the fourth quarter with the benefits increasing in 2020. We continue to expand our outboard engine presence in saltwater markets. Our industry-leading engine lineup will be on full display next week at the Fort Lauderdale International Boat Show, including our newest high horsepower outboards, the 400 and 450R. Power Products continues to perform in line with our expectations and its comprehensive line of electrical products has been a perfect complement to our parts and accessories portfolio. The business continues to be accretive to the overall performance of the parts and accessories portfolio. In the Boat segment, revenue and earnings were lower as anticipated due to the planned pipeline reductions I mentioned earlier. As we previewed on the Q2 call, saltwater fishing sales were affected by challenging comparisons between years at Boston Whaler. In the second half of 2019, the business is leaning pipelines in advance of upcoming major product launches compared to strong increases in 2018 due to pipeline fill of new Realm models. At retail, Boston Whaler had a very strong performance in the quarter, particularly in the larger products. The Boat business continues to focus on growing its premium boat brands as well as expanding operating margins. To further these initiatives, 3 important strategic actions were completed during the quarter. First, we formed the Aluminum Boat Group comprised of 7 leading aluminum or pontoon brands to fully leverage our scale and drive operational excellence. We also formed the Venture Group that comprises 4 of our value fiberglass brands focused on providing affordable and exceptional boating experiences and expanding boating participation. Finally, we officially opened the Boat Group Technology Center that joins industry-leading engineering and design functions to create a world-class center for product and technology development and design excellence. I will comment further on new product introductions later in this presentation. Lastly, Freedom Boat Club, our most recent acquisition, announced its 200th franchise location earlier this month and continues to perform as anticipated. This marks 100 new locations for Freedom in just over 3 years, demonstrating the strong growth potential of this business. Next, I would like to review the year-to-date sales performance of our segments by region on a constant currency basis, excluding acquisitions. In the U.S., total revenues were down 4% while international sales in total were up 4%. International sales for the engine segment, which represent 32% of segment sales year-to-date, increased by 6% with gains in most regions except Canada. Boat segment international sales, which represent 26% of segment sales year-to-date, were down 3%. As expected, European sales continue to be lower due to slower market conditions and the supply constraint caused by the transition from a contract manufacturing relationship that we noted at the beginning of the year. This demand will be fully recovered as we expand our production capabilities at our manufacturing facility in Portugal with minimal investment. The engine segment increase relates to increased demand for 175- to 300-horsepower engines in the European region. Canadian Boat revenue rebounded in the third quarter, bringing the year-to-date comparison flat versus prior year. As anticipated, the removal of the import tariffs in Q2 of this year spurred a partial recovery in wholesale demand in the region. This table provides some color on the performance of the U.S. marine market. In the third quarter, retail trends rebounded in most outboard boat categories, slightly ahead of our expectations, including a very strong increase in September. While still down on a year-to-date basis, the market performance in Q3 suggest healthy consumer sentiment as the challenging weather conditions influenced demand in the first half of the year. SSI data for the U.S. boat market is down 5% on both the year-to-date and trailing 12-month basis. NMMA outboard engine unit registrations are up modestly year-to-date with outboards 150-horsepower and above up low double digits and outboards below 150-horsepower down mid-single digits. These results reflect the softness experienced in value pontoon and aluminum fish categories in the first half of the year and strength in premium offerings which are benefiting revenue performance. Closing out the year, we anticipate fourth quarter retail results to be consistent with Q3, resulting in full year retail unit sales being down by mid-single-digit percent, giving us confidence in the retail market environment as we move into 2020. We continue to diligently execute our capital strategy and we've made excellent progress against our $400 million share repurchase commitment, which remains on track for completion by the end of the year. We also fully exited our remaining defined benefit pension plans early in the quarter and completed the retirement of our $150 million outstanding senior notes in August. Finally, we recently announced a 14% increase to our quarterly dividend, which represents the seventh consecutive year of dividend increases. This reflects the strength of our marine-focused portfolio, especially the strong and steady profitability of our parts and accessories business and its aftermath revenue, along with our ongoing commitment to deliver shareholder value. Our balance sheet position and cash flow continue to afford us the opportunity to deploy future capital in a variety of ways depending on market conditions, including for acquisitions, capacity enhancements, debt reduction or further share repurchases. Now I'll turn the call over to Bill for additional comments on our financial performance.

Thanks, Dave. On an adjusted basis, diluted EPS for the quarter was $1.10, off slightly versus third quarter 2018. Sales were down 6% or 9% without the benefit of completed acquisitions. Operating earnings were down modestly. However, operating margins improved 40 basis points, continuing the first half trend of margin expansion. This resulted in overall operating deleverage performance of 6%. Our third quarter overdrive was due primarily to factors Dave described earlier, including accelerated benefits from the previously announced cost control actions and improved sales mix, primarily in higher horsepower engines. On a year-to-date basis, net sales are up 2% versus 2018 and down 3% without the benefit of acquisitions. Operating earnings on an as adjusted basis have increased by 10% with strong margin growth of 90 basis points, an impressive adjusted operating leverage of 51%. In the Marine Engine segment, revenue was down 4% with benefits from Power Products and continuing robust demand for higher horsepower outboard engines offset by softness in both outboard engines 150-horsepower and below as well as sterndrive engines. These anticipated reductions are in response to OEM production cuts as a result of the retail market conditions in the first half of the year. Mercury's adjusted operating earnings were $146.4 million, slightly lower than 2018. Adjusted operating margins improved 60 basis points to 19% and operating deleverage was very favorable 5%. This performance reflects cost reductions, benefits from Power Products and positive changes in sales mix, which exceeded the impact of lower sales volumes I referenced earlier. In the Boat segment, adjusted revenues were lower by 12%. By category, aluminum freshwater sales were down primarily due to planned reductions in value pontoon and aluminum fish products. Recreational fiberglass gains included improvement at Sea Ray and saltwater fishing performance was in line with our previous expectations as Dave noted earlier. Wholesale units sold in the third quarter were down 18% versus Q3 of 2018 with a 10% decrease year-to-date, reflecting adjustments made to production volumes throughout the year in response to muted market demand in the first half of the year. Overall, average selling prices increased reflecting a more favorable mix and expanded content on boats, along with inflationary price increases. Adjusted operating margins were down and operating deleverage was 23%. This performance was due mostly to the impact of lower sales and production volumes as well as higher discounts, which were partially mitigated by our aggressive actions to manage our cost structure which will continue to benefit performance in future periods. We made excellent progress against our pipeline reduction targets in the quarter. Dealer pipelines ended the quarter with 30 weeks of boats on hand measured on a trailing 12-month basis, which is now up only 2 weeks from last year. Importantly, on a unit basis, field inventory is down slightly versus the end of the third quarter of 2018. We are now planning for weeks on hand at the end of the year to be flat to down slightly from prior year levels, which positions us very favorably heading into 2020. We anticipate third quarter wholesale trends to continue for the remainder of the year as fourth quarter retail activity is not material due to seasonality and dealers are unlikely to meaningfully adjust stocking plans in advance of the boat show season. Our third quarter continuing operations GAAP results also reflect the impact of excluding certain items from our as adjusted results. In operating earnings, these include restructuring, exit, impairment and other charges in the quarter totaling $8.1 million, primarily related to our previously announced structural cost reductions taken across the enterprise. In addition, we incurred $7.5 million of purchase accounting amortization in connection with both the Power Products and Freedom Boat Club acquisitions. As Dave mentioned earlier, we completed the exit of our remaining defined benefit pension plans, which resulted in a $294 million pretax noncash settlement charge related to the unamortized actuarial losses. This amount was also excluded from our as adjusted results for the quarter. We now anticipate full year adjusted diluted EPS of approximately $4.25 per share, which is at the midpoint of our prior guidance range of $4.20 to $4.30 a share. While we are encouraged by third quarter retail activity that has been better than anticipated, we are not anticipating any meaningful change to planned wholesale shipments in the fourth quarter and remain focused on rightsizing pipelines to ensure a clean start to 2020. Ongoing structural cost-reduction activities and a lower share count will continue to benefit comparisons. There are no other material changes to our outlook for the year as we anticipate revenue to be up slightly versus 2018 and operating earnings growth of a mid-single-digit percent due to solid improvement in both gross and operating margins. Moving to tariffs. There have not been any material shifts in our estimates. The recent news of an interim deal between the U.S. and China, including the delayed increase in the Wave 1 through 3 tariffs from 25% to 30% does not result in any significant change to our full year estimate impact of $17 million to $22 million of pretax earnings. Further, the Wave 4 tariffs will not have any material impact on our current estimate. Additionally, we assume that the exclusion on the 40- to 60-horsepower engines will be extended into 2020. On the Boat side, the retaliatory tariffs on boat exports to Canada were lifted in the second quarter. As Dave mentioned earlier, this had a favorable impact on wholesale demand comparisons in the third quarter and may continue to benefit demand into 2020. The impact of retaliatory tariffs on boat exports to the EU remains unchanged and incorporated into our plans. I will conclude with an update on certain items that will impact our P&L and cash flow for 2019. We now anticipate free cash flow in 2019 of approximately $260 million. Year-to-date free cash flow of $79 million is trailing our previous expectation due primarily to less favorable working capital performance in the engine segment, mostly in inventory and payables. We anticipate several factors will contribute to performance in the fourth quarter, including earnings and positive working capital trends. Offsetting the higher working capital usage is a more favorable cash tax rate compared to our prior estimate. The effective book tax rate for 2019 remains consistent with our previous guidance from the July earnings call. Finally, as Dave referenced earlier, our share repurchase plan remains on track, resulting in no change to our prior average diluted shares outstanding estimate of approximately 85.5 million. Our capital strategy assumptions generally remain in line with our estimates from the July earnings call with the exception of slightly lower planned capital expenditures and an increase in our quarterly dividend to $0.24 per share that Dave mentioned earlier. I'll now turn the call back to Dave to continue our outlook comments.

Thanks, Bill. As I mentioned in the opening of this call, we continue to execute against our plans for the year and our overall marine strategy with several key factors driving our future performance. For our Marine Engine business, we anticipate net sales growth in 2019 for the segment in the low single digit percent range with a solid improvement in operating margin. Our priorities for this segment continue to be satisfying demand and expending market share, especially in the greater than 175-horsepower category. With the added capacity coming online in the fourth quarter, we anticipate additional margin benefits as we satisfy greater levels of demand in the repower and international markets. Power Products continues to provide meaningful contributions to the parts and accessories business. We recently announced a new business called Power Products Systems Integrators, which will allow us to partner with OEMs to design comprehensive marine system solutions and add many of the digital switching features that boaters now expect. As a result of all of the portfolio changes we have made in the last 18 months, we are taking a fresh look at our management and internal reporting structure, and anticipate this review may result in a change to our segment reporting. While not finalized, we anticipate changes beginning with the first quarter of 2020. We will provide more information reflecting this potential change on the January earnings call. Similarly, the Boat segment continues to execute against its operating and strategic priorities. Our full year outlook is unchanged with projected modest top line and margin reductions in 2019. We will continue to focus our near-term efforts on managing pipeline inventory levels in order to put ourselves in a favorable position entering 2020 with substantial work already completed in the third quarter. Additionally, our structural cost reductions as well as the strategic actions within this segment that I referenced earlier in the call will both provide benefits to our margin expansion plans in 2020 and beyond. Freedom Boat Club continues to execute its growth strategy, and we've also started to capitalize on our synergy opportunity with our initial Freedom fleet conversions to Brunswick boats and Mercury engines. Our service and technology businesses also continue to execute against their strategic objectives and augment our outstanding products and distribution network. Our new product introductions, particularly with our premium boat brands, began during the quarter with the new Harris Solstice 230 and 250 pontoon models. These new product offerings demonstrate our focus on technology enhancements as both models have been equipped with CZone digital switching, part of the Power Products System Integrators product offering. You will see future new product launches continue to incorporate innovative technology enhancements that make boating easier. During our recently completed dealer meetings, overall sentiment has been very positive with excitement around our new product launches. Additionally, we're encouraged by the results from early model year East Coast boat shows with both Sea Ray and Boston Whaler reporting favorable trends compared to the prior year. In closing, our strong third quarter results demonstrates our ability to actively manage in a softer-than-anticipated marine market. Continued operating margin expansion, along with favorable deleverage metrics, highlight the benefits of the significant changes we have made in our portfolio over the past several quarters. We are confident in our ability to deliver shareholder returns consistent with our long-term strategic plan. We plan to deliver record earnings in 2019 in what would be the 10th consecutive year of adjusted EPS growth. Additionally, we remain confident in our ability to achieve our 2020 EPS target even in the event of a flat retail market in 2020. We are honored to be named the winner of the Soundings Trade Only Most Innovative Marine Company award. This is further evidence of our commitment to new product introductions, technology-enabled solutions and innovation and inspiration on the water. I'm also pleased to announce the launch of our new corporate website that gives our users a very contemporary view of our marine-focused company. I invite all of you to view the new look and functionality at brunswick.com. Next week marks an important early season saltwater checkpoint with the Fort Lauderdale event kicking off on October 30. We look forward to joining many of you there to see the strength of our high horsepower outboard engine lineup as well as the official debut of 3 of our upcoming major new products: the Boston Whaler 325 and 405 Conquest and our Sea Ray Sundancer 320 Coupe. This is only the beginning of a string of new product introductions across our premium brands over the next 3 to 6 months. I will now open the line for questions.

[Operator Instructions]. Our first question comes from Craig Kennison with Baird.

Dave, can you articulate, I guess, the strategic and financial benefits of your decision to establish the Brunswick Boat Group Tech Center and then also the Aluminum Boat Group? Trying to make sure we have that narrative right.

Yes. So I think the Boat Group Technology, I think both, Craig, I think both are really related to leveraging the total scale of our operation to deliver improved results at each of our boat brands. So as boats become more technologically advanced, we need more and more specialist capabilities to be able to deliver them. And with a fully distributed set of engineering activities that's not always possible. But consolidating those activities gives you all the capability, gives you the best design resources and the best engineering resources to deploy on each of the brands. And that's what we're doing. We have fantastic engineers and designers and specialists now able to deploy that expertise, particularly on Sea Ray and Boston Whaler, but they're actually also already supporting our other brands with innovative designs and new technology that some of the smaller brands wouldn't necessarily be able to implement on their own. So we're looking here for how do we leverage our scale for a competitive advantage. In terms of the Aluminum Boat Group, that has really been managed as a set of separate brands with individual kind of cost structures within each. So as a consolidated entity, we're able to take out, lean out the cost structure but also implement some capabilities like really contemporary digital marketing that we can deploy across all the brands. So the Aluminum Boat Group gives us a leaner cost structure, at the same time add increased capability for all of the brands.

Our next question comes from James Hardiman with Wedbush Securities.

So first, a little bit of a clarification. Maybe help us figure out what moved around between 3Q and 4Q. Obviously, 3Q came in better than you thought, but the guidance is at the midpoint of the previous range. So the implication is that fourth quarter's coming down a little bit. So what moved around a little bit? And then it looks like that targeted weeks on hand number is now flat to down as opposed to flat. What's the thought there?

Yes. Thank you, James. So I think, first of all, just taking a step back, I think we're going to come in very solidly for this year. And obviously, we're beginning to transition our focus to 2020. And so setting up for a strong year as we go into 2020. There was some favorable influences in Q3, particularly on margins and cost reductions, which could be a tailwind into Q4 if they persist. On the potential headwind side, it's just a quarter with a -- it's a relatively small quarter. And we don't necessarily know exactly what some of our Mercury customers, for example, OEM customers, are going to do towards the end of the year in December. What the demand will be as we go into the end of the year. So I think for the full year, we obviously want to get -- one of the priorities is getting the pipeline down, and I think we're really ahead of schedule on that and then we'll continue in those efforts. And then we're trying to balance out the tailwinds that we experienced in Q3 with just a little more uncertainty as we get towards, particularly at the end of the fourth quarter. But I would say on a favorable note that as we've entered the fourth quarter, the good retail trends in Q3 are persisting into the beginning of Q4.

James, I would just maybe add to that a little bit. I would direct you to -- when we set the guidance for the second half of the year that was tied to the $4.20 a share to $4.30, as we thought about Q3, we were definitely positioning ourselves towards the bottom end of the range. So that upside certainly contributes to us moving more towards the middle. And there's probably some things from a timing perspective, some operating expenses that ended up being moved from Q3 into Q4 which are timing-related. We've got things like FX that have moved against us marginally, but it still is a low single digit million number worse than what we would have expected three months ago. So things like that had kind of contributed to us really positioning ourselves right in the middle of where we thought we'd be 3 months ago.

Okay. That's helpful. And then maybe a more difficult question. Obviously, the industry had a rough first half of the year, right? A significantly better third quarter. But as we made our way through the quarter, July, I thought the July number was really good just given it was a tough comp, but maybe there was some pent-up demand there. I don't know if you think that was also the case in August. But then, at least according to the SSI, the September was a fantastic number, maybe the best number in a few years. So I guess my question is, how does the demand environment feel to you guys right now? I mean, obviously, the most recent number is up a bunch. Does it feel up? Does it feel flat? Does it feel down? There's a lot of sort of mystery or misinterpretations that we could have based on a month here or a month there. But how does it feel to you guys?

I think it feels pretty good. We consistently, I think, said that we thought that the vast majority of the effects in Q1 were weather-related. And that once that weather issue normalizes, begin to see demand more in line with our expectations. And I think that's what we have seen. So despite a number of kind of ups and downs at the macro level, I would say that particularly the recent East Coast boat shows have been very strong. We've seen significant improvements in retail activity over last year. So retail on the ground seems good. The momentum that we had in September seems to be continuing. So I feel like our read on the market was pretty good and I get a good sense of dealer sentiment picking up as well.

Our next question comes from Steven Zaccone with JPM.

I just wanted to follow up on the previous comment about Mercury. So as we think about the fourth quarter, should we be expecting propulsion sales to decline again? Obviously, it will be less than the third quarter decline, but would you expect them to still be down? And then just staying within Marine Engine. On the P&A side, it looks like on the organic basis it was down for the second straight quarter. So I understand the market's volatile, but could you just elaborate what's driving the recent P&A weakness and maybe when you expect that to return to growth on an organic basis?

Steve, this is Bill. I would comment that your directional comments on Mercury sales in the fourth quarter are correct. They will be down but not down to the same degree they were in Q3. On the P&A business, you got to remember that there's 75% of that business which is aftermarket, which is continuing to be stable and up slightly. The OEM side of that business, which is about the other 25%, is subjected to a lot of the production reductions we're seeing across the marine industry here in the second half. So there's nothing there that causes us any concern. It's behaving exactly the way we thought it would. And the portfolio there is performing the way we would expect it to perform.

Got it. Got it. And then just more broadly on 2020, can you talk to your preliminary top line expectations for next year? Are you expecting both Marine Engine and the Boat segment to return to growth next year? And maybe just what's the best way to rank the drivers that are going to drive the improvement in the top line?

Steve, I would say what we've talked about for 2020 is we're going to see organic growth opportunities without any help from the market kind of in that, call it, $0.60 per share range, plus or minus maybe $0.10. It's really comprised of 3 things. It's growth in outboards as we bring new capacity online for the 175- to 300-horsepower engine family. We would expect to see more normal growth in the P&A business as weather normalizes next year. And we would expect to see a pop in wholesale. Remember, we have been a growth in boats. We've been producing and wholesaling well below retail this year. In a stable retail environment, we will naturally see a rebound in wholesale demand to match what's going on at retail. Those 3 things, if you start to think about what the growth would be, it's very close to that mid-single digit sort of number that we typically will talk about what our organic growth opportunity is. And that's without any help from the market.

Yes. I think we're very, very excited about the growth opportunities in all the elements of the business in 2020. As we said, even with a flat market, we'll get that growth. We're excited about what's happened in Q3 on the retail side and what seems to be a good start to Q4. We have not talked that much about new product launches either, but I can tell you that 2020 is going to be one of the most exciting product years that we have ever had. And the launches that you see at Fort Lauderdale are just the start of what you will see. So the initial response even to some of the products that we've teased already has been spectacular. So I'm really excited about 2020.

Our next question comes from Eric Wold with B. Riley.

Two questions. I guess, first one, you obviously noted that inventory is down slightly in units in September. Can you talk about kind of the level of promotional activity that you kind of saw needed to kind of move that inventory? And then how would you characterize the inventory in terms of maybe boat type and age?

As we said, we increased promotional activity in Q3, but it was essentially in line with the market, I would say. That will moderate in Q4. So that was really helpful in Q3 to get things moving. I would say, inventory levels versus the kind of baseline that we just set, which is about, what, 30, we're about 30 weeks in that right now. As I looked across all of the segments, we're talking about modest differences within a couple of weeks depending on which one you look at. But all of the segments are coming down in line with our expectations. There isn't an anomaly somewhere. I would say the only thing is, as we mentioned, we did pull down Boston Whaler particularly somewhat in excess of the average because of the new product launches that are imminent and will continue through the next 12 months.

Okay. And then the follow-up question, a broader question, maybe one that's kind of tough to answer. But as you have conversations with your dealers, especially as you move into boat show season, are you seeing any changes in purchasing behavior from boat buyers, maybe things around financing needs and approvals, price points they're gravitating towards, time to make a purchase decision, anything you'd kind of point to there?

No. I would say that we haven't seen any material change in financing. I would say that we continue to see in the early or late season shows, depending on which way you look at it, the East Coast shows, we've seen particular strength in the large Sea Ray and the large Boston Whaler. I would say, as you probably noted in the recent SSI though, improvements were across the board, but I would say that trending towards the more premium brands.

Our next question comes from Tim Conder with Wells Fargo Securities.

Just a couple of clarifications here and then one question. The channel inventory clearance, Bill, can you give us any color on a year-over-year basis or absolute dollars how much the incentives or promos related to that in Q3 impacted margins? And then just to clarify a prior statement, you're looking at for 2020 in marine retail units to be flat in the U.S. or was that a global or yes, yes to that? And then one base question is related to the ramp in the high horsepower outboards. I thought you guys might be shipping more in Q4. It sounds like that's potentially pushed back a little into 2020. Has there been any shift in the timing of that ramp or those shipments or is that still is what you had originally planned all along?

Yes. Maybe I'll take the last one first, Tim. It's Dave. Yes, there's been no change at all. The ramp-up in the unit daily volume has been ongoing and continues into Q4 as that additional capacity comes online. So we are already going to start getting additional benefit in Q4, but the majority of it will come as we enter 2020.

Tim, if you look at the year-over-year margin movements in Boats in Q3, about 1/3 of that was related to discounts. So if we're down 240 basis points, it comprises about 1/3. If you think about overall discount levels in the quarter, it's a fairly small number compared to the overall sales volume. So we're not talking of double-digit millions number here, it's more of a single-digit millions number just to kind of put it into context. And when you think about our assumption for next year in 2020, I would say it triangulates to a flat unit, flat dollar sort of an assumption. So I think if you consider what we've seen in the market relative to ASP growth and things like that, we're just assuming flat on both. And I would say, we are not at this point in time making a market call. It is more of a, without any help from the market, we feel that we've got $1 per share of growth opportunities that helps us get up into that $5 to $5.50 per share range next year.

And our next question comes from Michael Swartz with SunTrust.

Just wanted to start off on just the engine margins during the quarter. I'm just trying to get a sense -- Tim was well ahead of what I was looking for, but just trying to get a sense of how much of that is product mix towards the higher horsepower versus aftermarket OEM versus some of the cost savings you've seen, if there's any easy way to bucket that, would appreciate it.

Yes. Michael, I'll take that one. I'd say, in Q3, we got favorable effects from mix. We got favorable effects from operating expense benefits. I'd say the operating expense reductions and cost management activities are greater than mix. Headwinds, we're certainly operating at lower production levels and tariffs in the quarter are not a bad guy. A year ago, we were actually incurring tariffs. We were recording expense for tariffs on the 40- to 60-horsepower engines which were subsequently reversed in Q4. That actually ends up being a little bit of a headwind for us in Q4.

Okay. Great. And sticking with tariffs, understanding that Wave 3 going to 30% and List 4 wouldn't have much, if any, impact to '19. But is there a way to think about what the annualized impact of those 2 items would be as we think about 2020, maybe what the increment would be?

Yes. Michael, it's Ryan. I'll take this one. Yes. I mean, what we're looking at now is something very similar to the impact in 2019. Could there be a small increase depending on percentages moving around depending on additional componentry coming in from China related to the 175- to 300-horsepower capacity improvement? Yes. I think you could see that, but it would be a low to mid-single-digit million number. So we anticipate tariff impact as we know them today to be roughly the same as this year with maybe a slight increase.

Okay. So the increase would be low to mid-single digits, not?

Correct. Correct.

Our next question comes from Gerrick Johnson with BMO Capital Markets.

A couple of questions. First, on outboards, the decline in sub-150-horsepower. Is that purely market-driven or perhaps are you losing some share in that market?

No. Our share continues to be very strong. It really is related to the softness that we experienced in pontoon and the fishing boat, aluminum fishing boat sales in the first half of the year. We have an extremely strong lineup, 150-horsepower and below, in addition to the substantially new lineup which is above that horsepower range. So the other good news for us is, I think, as we free up the constraint on the new outboard family, which was 175 to 300 but now includes the 450, and begin to use that to gain further market share, we will pull along the rest of the product portfolio with us. Most companies that we are talking with already about taking our engines want a full portfolio, not just the new engines. So really, we expect that capacity in the 175 to 300 not just to unlock market share opportunities in that range but to unlock a full portfolio of market share opportunities.

Excellent. And then the inventory in the field, relatively flat, but how is the aging? What is the average age of a unit out there compared to last year?

We track really stuff that's 12 months and older, and that's still in excellent shape on a historical basis, maybe elevated a little bit, Gerrick, but still in very excellent shape. And we're also looking at the composition of 2019 model year product versus 2020. We made a lot of headway in Q3 rebalancing that to more align with where you would expect it at this point in time. It's still a little bit higher than it was. But if you look at some of the historical activity there, we are still at very comfortable levels. So nothing that creates any sort of material risk for us or gives us any concern looking forward.

Great. And David, I have one more that I've had a lot of request for me to ask this one. Last quarter, I asked you your confidence in your 2020 guidance on a scale of 1 to 10 and I think you said 11 to 12. So I have to ask again, where are we on that scale right now?

We're north of 11 to 12, Gerrick. I would say that I'm very excited about the progress that we have made setting out for 2020, both on the inventory side, on some tailwinds on retail. So very, very confident, let's say 15 this time. I don't know. We throw out a number there.

Our next question comes from Joe Altobello with Raymond James.

Just want to go back to inventories for a second. The expectation now is to end 2019 with weeks on hand flat to down slightly, which implies a modestly more aggressive reduction than we were talking about 3 months ago. It sounds like you expect weeks on hand to remain about flat next year as well or at least that's what's baked into the $5 to $5.50 EPS guidance. And the reason I ask that is, we've heard different things from different manufacturers in recent weeks, but it sounds like you're not hearing any heightened conservatism among dealers or floorplan lenders at this point going into 2020.

There's certainly no sort of conservatism being put on by the floorplan lenders. I think, us specifically, we have been extremely proactive of managing inventories with our dealers to get them where they want to be at the end of the year. So I'm very, very comfortable with where we're going to end the year. And I think, at the margin, we're not talking about a significant sort of adjustment in metrics at the end of the year. It's a week. It's not 4 or 5, which would indicate a much more material shift in dealer sentiment. I just think in advance of the boat shows, there's probably some desire to see a bit more of the model year '19 product clear through the channel in advance of stocking product for 2020. And I don't expect that to be a big issue once the calendar turns into 2020.

Okay. It's very helpful. And then just switching gears to CapEx. The outlook this year is now $230 million. I guess it was $240 million, $260 million. What's the reason for the reduction? And as we think about what a normalized level of maintenance CapEx is for you guys, obviously, excluding the capacity investments, what does that look like for 2020 and beyond?

So I would say the reduction has been a little bit of just re-evaluating projects and timing, but a lot of it is just payment timing. When things get done, when they get paid for is how it rolls through the cash flow statement. So this is not a material change in any of our capacity plans at Mercury or any of our new product development plan. So all of that stuff remains very much intact. Normal run rate, we typically talk about 3.5% to 4% of sales. I think that puts us in a position where we're both investing in product at fairly healthy levels and increasing capacity on a measured basis to meet what increased demand is. I think what you've seen happen this year is a meaningful step-up as we introduce new product and raised capacity beyond what we would normally do really pushed us into that $250 million range this year, now $230 million.

Again, I just want to reinforce, there is no change to our plans for capacity expansion, and we have not adjusted any of our product development plans.

Got it. Okay. But is that 3.5% to 4% number a good number for 2020 or you think more 2021?

No. That's a good number.

Our next question comes from Scott Stember with CL King.

Yes. Can we talk about on the repower side. I think you mentioned some excellent growth there this last quarter. And certainly, the new family of engines is certainly helping there. But can you maybe talk about the different parts of the world where you're seeing the most growth?

A substantial portion of the repower market is in the U.S. And really, as we progressively unlock additional capacity on the new engine family, we have had pent-up demand in our dealer channel to be able to accept new engines for repower. And we're beginning to be able to satisfy that, which have been a constraint last year and even earlier this year. So repower market is particularly strong in the U.S., I would say, and also in other areas. Dealers, the channel to market in other areas outside the U.S. is a little different to in the U.S. In the U.S., it is predominantly OEM with some repower. In Europe, for example, almost all engines go through a dealer channel. So it's a little different measurement outside, but I would say, good growth in the U.S. as we've been able to free up more capacity.

Got it. And then lastly, you might have touched on this earlier, I might have missed it. But just for 2020, just priorities for cash and I know you guys are completing your or getting close to completing your share repurchase plan that you talked about before, but how do we expect to prioritize the buckets for 2020?

Well, we will, obviously, have continued capital investments, not quite at the level that we were at this year. We expect to complete our $400 million commitment to share repurchases in 2019. However, we have authorization for another $200 million beyond that should market conditions allow. And then we have continued to mention that we will continue to look at acquisitions, particularly parts and accessories and annuity-related businesses that fit more into our P&A portfolio and maybe our service business portfolio. Do you have any other comment, Bill?

No. That's perfect.

Our next question comes from David MacGregor with Longbow Research.

I wonder if you can just talk about materials and component costs and the extent to which that provided any kind of benefit in the third quarter and just maybe your expectations for fourth quarter? Then I've got a quick follow-up.

David, I think commodity costs have been pretty under control. We have seen very normal levels of inflation, if you like, on the cost side, nothing extraordinary. I wouldn't say they provided a benefit. I wouldn't say they were a headwind either.

Yes. I would just say, sequentially, we're starting to see year-over-year trends start to normalize a little bit. I'd say, we went through a period for 12 months or so where we saw a bit more elevated inflation and then associated price increases as we get into the back half of the year here. Both of those are much more kind of in line with what historical trends would have been.

I would just say, just connecting to a backlog question that Craig Kennison asked earlier about, the value of things like the Aluminum Boat Group. Part of the value there is us approaching commodity suppliers and component suppliers as a complete entity and making sure that we are realizing the economies of scale that we should be expecting considering the size of our buys. So in addition to the product development and SG&A reduction that is afforded by the organizational changes that we made, we will be using that to leverage the product cost as well.

Is there any way to think quantitatively about the benefit of that scale advantage?

Yes. I think it's certainly, we will begin to see the benefits of it next year. It will become more apparent in the bottom line.

And just my follow-up...

Dave, I think we've been pretty direct with people that we have aspirations to get the margin of that business to be double digit over time. And it's certainly one of several levers that we have at our disposal to contribute to that.

Yes. I can tell you we are laser-focused on that and we are putting in place or actually executing on all the levers we need.

Okay. And just quick follow-up, I guess on this additional capacity in the engine business. It's kind of exciting, I guess, in terms of what it could mean for growth, but can you help us or just remind us in terms of just the extent to which it will enable growth? I mean, how much additional capacity are you putting in place? And does it kind of cadence up over 2020 or is there kind of a step function increase and then it's really up to you to sell that capacity going forward?

Let me see, in the new family of engines that we introduced, which is where the capacity is really mostly going in, we have stated roughly a 20% or so increase in capacity available to us as we go into 2020. I think our manufacturing operations in Mercury does a wonderful job of teasing out every engine. So I would expect them to continue to optimize that new capacity over time, but it is a very material increase and certainly will unlock the opportunity for market share gains that have really been there but just latent as we've been waiting for the capacity to come online.

And our next question comes from Joseph Spak with RBC.

Just, I guess, a quick follow-up on the last question, maybe you answered it. But it does seem like on the Boat side the focus maybe is more on margin expansion at this point, and I think you mentioned that sort of double digit target. But is that achievable even if a relatively sort of flat outlook over the midterm? And if so, is that just from, I guess, greater efficiency and utilization in the plants or what's sort of the driver of that?

Is it achievable with a flat market in the medium term? Yes is the answer to that. We have a number of things that are going on, including in the areas that you mentioned around operational performance improvement. The leverage that we have, as I've mentioned in some kind of earlier calls, in getting our manufacturing efficiency up to already demonstrated levels in our best plants is very, very large. But on top of that, the kind of cost-reduction efforts that will begin to bear fruit strongly, particularly in 2020, they're actually showing some benefit already. And we have all the levers we need to get to double digits.

And I would say our product investments, Joe, are very much focused on places where we believe a lot of the significant profit opportunities are. If you look at what we're doing at Boston Whaler, if you look at what we're doing at Sea Ray, even brands like Lund and Harris where we've got opportunities to satisfy demand in premium markets, all of that stuff should be very helpful to get to where our targets are.

Are you willing to indicate how many of the plants are sort of not at that best-in-class level?

I would say that we have strongly demonstrated very high capability in several plants, but there are several others that have opportunities. So I wouldn't be more specific than that.

Thank you. And at this time, we would like to turn the call back to Dave for some concluding remarks.

Well, thank you very much for attending. I'm very excited about the progress we made in the third quarter of this year. I think we demonstrated the ability to manage in different market conditions. We demonstrated the effectiveness of the actions that we've already taken in delivering, I think, a really exciting level of earnings performance against expected levels of revenue. I think the tailwinds that we're seeing in the latter half of Q3 and into Q4, in combination with the progress that we've made on pipeline reduction, both of which are slightly better than we anticipated, sets us up very nicely. I'm very, very excited about the Fort Lauderdale Boat Show. I hope many of you will join us there. I think it will be a great event demonstrating on all sides of our business the incredible power of our marine platform. So exciting times ahead for us and thank you for joining us.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.