Brunswick Corporation (BC) Q3 2021 Earnings Report, Transcript and Summary

Good morning and welcome to Brunswick Corporation’s Third Quarter 2021 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 Brent Dahl, Vice President, Investor Relations.

Good morning and thank you for joining us. With me on the call this morning are Dave Foulkes, Brunswick’s CEO and Ryan Gwillim, CFO. Before we begin with our prepared remarks, I would like to remind everyone that during this call, our comments will include certain forward-looking statements about future results. Please keep in mind that our actual results could differ materially from these expectations. For details on the factors to consider, please refer to our recent SEC filings and today’s press release. All 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. I will now turn the call over to Dave.

Thanks, Brent and good morning everyone. Our businesses had another outstanding quarter. We have now delivered our fifth consecutive quarterly record for adjusted operating earnings and EPS as a result of our robust operational performance, successful mitigation of supply chain challenges and active management of overall cost inflation throughout the enterprise. Despite challenging comparisons to last year, retail demand for our products remains extremely healthy. And we continue to take market share with our Mercury outboard engines in many of our boat brands. In addition, Freedom Boat Club continues to grow its membership base as we rapidly expand this very successful and synergistic shared access participation model. Robust retail demand for our products has driven field inventory to the lowest level in decades at just over 10 weeks on hand. We continue to increase production to meet demand across our businesses though in some cases, supply chain constraints are limiting our ability to overdrive our production plan. As we close out 2021, we are focused on elevating production levels to meet demand and refill field inventory during the retail off-season, integrating Navico and our other acquisitions, progressing our strategic initiatives and closing the most successful year in Brunswick’s history, while laying the groundwork for the next wave of success in 2022. Our businesses are focused on closing out another year of robust earnings and shareholder returns, with strong margin growth and substantial free cash flow generation resulting from our outstanding operational performance in a healthy marine market and we have increased our 2021 guidance accordingly. Before we discuss the results for the quarter, I wanted to share with you just a few of the awards and award nominations that Brunswick received during the third quarter. For the second time in 3 years, Brunswick and Mercury Marine were jointly presented with a Soundings Trade Only Most Innovative Marine Company award at the IBEX Trade Show in Tampa last month. The panel of judges praised Brunswick and Mercury for a record-setting 2021, filled with multiple industry changing product launches such as the V-12 600 horsepower Verado outboard engine and the Sea Ray 370 Sundancer amongst others. Additionally, Brunswick and Mercury were commended for committing to the health and safety of our employees and for our extraordinary efforts to continue meeting customer demand during the global pandemic. Brunswick has also been recognized for the second consecutive year by Forbes and Statista as one of the world’s best employers. Of the thousands of companies eligible for this recognition, Brunswick was 1 of only 750 companies selected to receive the award, ranking in the top 10 companies in the world within the engineering and manufacturing category. Brunswick is also thrilled to be nominated for several other major awards, including a Consumer Electronic Show Best of Innovation award, 5 Step Ahead awards recognizing women in manufacturing, 5 DAME product design awards from METS Trade, 3 International Best of Boats awards, 2 European Powerboat of the Year awards, and 2 IBI Boatbuilder awards. Our commitment to democratizing and diversifying boating and the boating industry is central to our strategy and vital to ensuring our access to talent and to the continued growth of our customer base. In past quarters, we provided updated demographic trends and insights around first-time and recurring boat buyers as well as demographic changes. I’m pleased that we are not seeing any pullback in the encouraging trends we experienced during 2020. We are also continuing to see Freedom leading the way with these demographic shifts. Since 2019, Freedom has seen notable increases in the ethnic diversity of our members, which grew from around 10% in 2019 to 15% now and the percentage of women making up our total member base, which grew by 130 basis points to 35%. Also of particular note, the percentage of Hispanic Freedom members almost doubled to 8.4% in 2021 from 4.7% in 2018. We’re very encouraged by these trends that will help secure a healthy future for Brunswick and the entire marine industry. I’d also like to share with you some consumer insights gained through the polling of Brunswick’s Ripple online boating community, which includes both new and seasoned boaters. Of those surveyed, approximately 60% worked remotely at least partially, and 44% of those polled have been able to fit boating into their work week this season, with more than 20% actually working from their boat at some time. Most people who fit boating into their work week during 2021 expect to continue doing so during 2022, which further supports our belief that persistent changes in the way people work will provide more opportunities for people to get out on the water and maintain boat usage at elevated levels versus pre pandemic. I’ll now provide some third quarter highlights on our segments and the overall marine market. Our propulsion business delivered another quarter of significant top line and earnings growth, with more favorable customer mix leading to stronger margins than anticipated. Over the last 2 years, Mercury has gained an extraordinary 310 basis points of U.S. retail market share with outsized gains in higher horsepower products, where a significant amount of investment has been made in recent years. Additionally, demand for the new V-12 600 horsepower Verado engine has been exceptionally strong, and we’ve already delivered product to 24 different OEMs. Outstanding execution, robust aftermarket demand driven by elevated booking participation and favorable late season weather conditions in many areas resulted in our Parts and Accessories businesses overdriving expectations in the quarter. In addition, our Advanced Systems Group announced the tuck-in acquisitions of RELiON Battery and SemahTronix during the third quarter to further complement its existing portfolio of lithium-ion batteries and to vertically integrate complex electrical wiring harnesses, respectively. These acquisitions, along with the closing of the Navico acquisition earlier this month, will further strengthen our enterprise-wide ACES strategy and enhance our ability to provide complete innovative digital solutions to consumers and comprehensive integrated systems offerings to our OEM customers. Finally, our boat business continues to deliver strong top line growth in a disrupted environment. Despite supply chain challenges, cost inflation and labor tightness at our suppliers and some of our own facilities during the quarter, we anticipate annual unit production of greater than 95% of our original production plan for the year, with shortages and delays primarily constraining additional upside. By comparison, our propulsion business is anticipated to produce approximately 110% of its original 2021 production schedule. Finally, Freedom Boat Club continues to expand rapidly while attracting a young and diverse customer base. Freedom is now approaching 320 global locations and 47,000 memberships network-wide with more than 4,000 boats in its overall fleet, including an increasing percentage of Brunswick boats and engines Next, I’d like to review the sales performance of our business by region on a constant currency basis, excluding acquisitions. As expected, all regions posted significant sales growth in the quarter versus both 2020 and 2019. Except for Asia-Pacific, we saw sales normalize slightly in the third quarter but still up 26% versus the same period in 2019. Domestic sales grew 14%, with international sales up 17% versus the prior year. This table provides more color on the recent performance of the U.S. marine retail market, comparing the first 9 months of 2021 to the same periods in 2020 and 2019. The year has played out largely as we expected with easy comparisons through the first portion of the year, primarily due to the impact of COVID in 2020 and more difficult comps beginning in May. Since our July earnings call, the industry has experienced more pronounced supply chain disruptions than anyone anticipated, which, together with the more direct impact of the Delta variant, has led to a more significantly inventory-constrained retail environment. The result is a reported 8% decline in main powerboat retail unit sales year-to-date when compared with the same period in 2020 but still 3% greater than the same period in 2019. Brunswick’s year-to-date performance is generally somewhat ahead of the overall market with outsized market share gains in aluminum products. Outboard engine unit registrations were down 6% through the first 9 months of 2021 when compared with the same period in 2020, with Mercury outperforming the industry. Mercury’s outboard engine unit registrations compared with the same period in 2019 are up more than double the industry’s market growth rate, resulting in a significant market share gains we’ve experienced in recent years. It’s important to note that all indications are that retail declines are being driven by product availability and are not a result of declining consumer demand. U.S. lead generation, dealer sentiment and other leading indicators all remain very positive. For example, all of our 2022 model year and 80% of our 2022 calendar year production slots are already sold out. And we continue to see a significant percentage of boats leaving our manufacturing facilities already retail sold. All these factors give us high confidence in the continuing retail strength as we enter 2022. This slide provides some perspective on the impact of inflation on our businesses, together with our ability to take price increases to mitigate the net impact. Based on our early view of price inflation in the third quarter, we implemented higher than normal annual price increases in July to mitigate the anticipated levels of input cost inflation in the back half of the year. However, input cost inflation has exceeded our estimates, so we’ve implemented additional price increases during October in both our Propulsion and Boat businesses to ensure that we cover inflation with pricing on a full year basis. Between direct materials, labor and freight, we anticipate input cost inflation to be in the high single-digit percent range versus 2020 on a run rate basis, with a significant majority of the impact felt in the second half of the year. Consequently, we may need to take further mid-cycle increases and/or higher-than-normal increases in 2022. However, we believe the price increases we’ve implemented to date are generally at the lower end of those implemented across the industry and are not impacting raw demand. I’ll now turn the call over to Ryan for additional comments on our financial performance.

Thanks, Dave and good morning, everyone. Our businesses delivered another outstanding quarter. When compared with 2020, third quarter net sales were up 16% with adjusted operating margins of 15.5%. Operating earnings on an as-adjusted basis increased by 9%, and adjusted EPS was $2.07, once again setting new all-time highs for any third quarter for which we have available records. Sales in each segment benefited from increased volume due to strong global demand for marine products, market share gains and increased pricing with earnings positively impacted by increased sales and favorable changes in foreign currency exchange rates, partially offset by increased input costs and increased spending on sales, marketing and ACES and other growth initiatives. First 9-month comparisons are also very favorable, with 2021 net sales up 39% when compared with the first 9 months of 2020 and adjusted operating margins of 16.5%, a 290 basis point improvement from 2020. This resulted in adjusted EPS for the first 9 months of $6.82 and a very robust operating leverage of 24%. We have generated almost $300 million of free cash flow through the first 9 months of the year, which is a strong result considering the incremental working capital needed to satisfy increased needs for inventory as we elevate production levels and the $60 million increase in capital spending when compared to the same prior year period. Turning to our segments, revenue in the propulsion business increased 19% versus the third quarter of 2020 and was up 58% versus Q3 of 2019. Strong demand for all product categories, together with market share gains, drove higher sales, which continue to be enabled by increased production levels. Operating margins were flat versus 2020, but up 320 basis points versus Q3 of 2019 as pricing, favorable absorption and benefits from more favorable sales mix were able to offset higher manufacturing costs, primarily caused by material inflation. In our Parts and Accessories segment, revenues increased 7%, and adjusted operating earnings were up 2% versus the third quarter of 2020. Adjusted operating margins of 22.2% were down 120 basis points when compared with the prior year quarter and were negatively impacted by the closure of a key manufacturing and distribution location in New Zealand for a significant portion of the quarter due to national COVID lockdowns as well as increased spending on growth-related investments. Favorable late season weather in many regions is allowing for increased boating participation, which should continue to drive aftermarket sales in Q4 and into 2022. In our Boat segment, sales were up 22% and adjusted operating margins were down 230 basis points to 6.9% when compared with the third quarter of 2020. When compared to the third quarter of 2019, sales were up 45% and adjusted operating margins were up 240 basis points. Sales increased in all product categories with particular strength in aluminum freshwater, including our pontoon businesses. Increased sales volume and pricing together with lower retail discount levels versus prior year were offset by material inflation, higher cost due to manufacturing inefficiencies and increased spending on growth initiatives, resulting in slightly lower segment operating earnings. Freedom Boat Club, which is included in business acceleration, contributed approximately 3% of the segment’s revenue at a margin profile that continues to be accretive to the segment. Turning to pipelines, as Dave mentioned earlier, we believe our boat production will reach at least 95% attainment of our original production plan for 2021, a remarkable achievement given the current supply-constrained environment we are working in. Supply chain challenges, including delays in receiving certain components, has resulted in the deferral of shipping certain nearly completed boats to subsequent quarters. As a result, we wholesale sold approximately 8,200 boats during the third quarter, which was roughly the same number of units sold at retail and 16% greater than the number of units wholesale sold in the third quarter of 2020. This keeps dealer inventories at an all-time low of approximately 7,400 units. Our boat brands ended September with just over 10 weeks of boats on hand, measured on a trailing 12-month basis, with units in the field lower by 27% versus the same time last year. As we head into the fourth quarter, our businesses are focused on closing out another year of robust earnings and shareholder returns with strong margin growth and substantial free cash flow generation resulting from our outstanding operating performance in a healthy marine market. Although we continue navigating certain headwinds, including elevated supply chain, labor and transportation costs and challenges, we are confident that we can continue to drive growth and innovation as the clear leader in our industry. Now including the projected benefits from our closed acquisitions, including the acquisition of Navico, we are providing the following updated guidance for full year 2021. We anticipate the U.S. marine industry retail unit demand for the full year to improve from reported year-to-date levels, ending at close to flat versus 2020, net sales of approximately $5.8 billion, adjusted operating margin growth between 150 and 180 basis points, operating expenses as a percent of sales to remain lower than 2020, free cash flow in excess of $425 million and adjusted diluted EPS of approximately $8.15, which represents a 61% increase over 2020. Note that we believe acquisitions will contribute about 10% of the fourth quarter’s revenue growth, but will be neutral on EPS after including the impact of additional interest costs related to the financing of the Navico transaction. I will conclude with an update on certain items that will impact our P&L and cash flow for the remainder of the year. The only meaningful update relates to our effective tax rate for the year due to some favorability related to foreign branch income and certain state tax law changes, we now believe our effective tax rate for 2021 will be approximately 21.5%, which is slightly lower than our estimate from the July call. We have also updated our guidance associated with working capital and intangible amortization associated with our completed acquisitions. Similarly, our capital strategy assumptions have not materially changed with the execution of the financing for the Navico transaction, creating a slightly higher interest expense for the year, with approximately $25 million of additional debt retired as a result of the tendering of our 2023 and 2027 notes during the financing process. We anticipate ending the year with debt leverage of 1.7x on a gross basis and below 1.5x on a net basis. Additionally, our $43 million of share repurchases in the third quarter brings our total share repurchases for the year to just shy of $100 million, and we have adjusted our guidance to show that we anticipate reaching approximately $120 million worth of share repurchases by the end of the year. I will now turn the call back over to Dave to continue our outlook comments.

Thanks, Ryan. Very solid operational execution by our businesses has us squarely on track to deliver an outstanding 2021 as we execute against the operating and strategic priorities we’ve discussed throughout the year. Our top priority for the Propulsion segment continues to be satisfying outboard engine demand from new and existing OEM customers and expanding market share, especially in dealer, saltwater, repower and international channels. We’re continuing to invest heavily in new product introductions and industry-leading propulsion solutions that we project will enable top line and earnings growth far into the future. Our accelerated incremental capacity projects remain on track for completion by the second half of 2022 and we believe will allow us to gain additional customers who have already expressed their interest in being supplied by Mercury. Our Parts and Accessories segment remains focused on optimizing its global operating model to leverage its distribution and position of strength in areas of battery technology, digital systems and connected products in support of our ACES strategy. We are keenly focused on our thoughtful acquisition integration activities for Navico, RELiON and SemahTronix. And we will continue to focus M&A activity in higher technology systems in Parts and Accessories businesses as we review opportunities to further build out this increasingly large, high-margin recurring revenue portion of our business. The Boat segment will continue to focus on launching new products, executing significant capital expansion plans, increasing its efforts to become more vertically integrated to help mitigate future supply chain issues and refilling pipelines in a very robust retail environment. Freedom also continues to expand its footprint with the recent acquisition of the Connecticut territory, which has seven locations and over 600 memberships. Combined with the purchase of the New York territory earlier this year, we can now take advantage of cost and other synergies in the Northeast U.S. region and can more quickly expand the number of locations. Before we close out our comments this morning, I wanted to leave you with a few more updates. We’ve already begun to see positive early returns from the completed Advanced Systems Group deals with RELiON winning new business from significant OEM and retail distribution customers. In addition to the Connecticut acquisition early in the fourth quarter, Freedom Boat Club continued its international expansion plans with the acquisition of Fanautic Club in Spain during the third quarter. We believe that our pace in rapidly expanding these future-orientated recurring revenue businesses will further distance us from potential competition. As most of you are aware, we’re also beginning to see the resumption of in-person boat shows like the Fort Lauderdale Boat Show that kicked off yesterday. And early in September, we participated in the Cannes boat show, one of the most important European events for our brands. The feedback in Cannes from our channel partners and end consumers on the new V-12 600 horsepower Verado and our new boat models was extremely positive. Mercury reported double the number of outboard engines at the show than its closest competitor and significantly more outwards on display than all other manufacturers combined. Sea Ray also reported a 65% increase in its revenue versus the 2019 show, while all other Brunswick brands on display reported strong consumer interest and sales. We have continued to launch new products at a rapid pace across the enterprise. On the sustainability front, we also reached another important milestone during the third quarter, with the Land ‘N’ Sea Kellogg Marine distribution operation becoming the third Brunswick location to achieve a zero waste to landfill designation. And Mercury won an Association of Energy Engineers award for this newly installed solar array in Wisconsin. We are working to further expand our sustainability initiatives, and we will share more on this subject early next year. Finally, I want to once again offer a heartfelt thanks to our global employee population for all their dedication, effort and sacrifices during what is still a challenging time for some of our families and communities. Your hard work has enabled us to seamlessly execute our strategic plan and significantly outpaced our initial growth and profit expectations. We will now open the line for questions.

Thank you. [Operator Instructions] The first question comes from Matthew Boss with JPMorgan. Please, state your question.

Hi, good morning, guys. This is Kevin Heenan on for Matt. Congrats on a strong quarter.

Thanks, Kevin.

So I just wanted to ask on the U.S. retail market, if you could elaborate on your confidence in the outlook provided today, in regard to the improvement to flat for the year relative to the down 10% for the total industry year-to-date or 8% for the powerboats and how you’re thinking about retail demand as we move into 2022? Thanks.

Yes. Thanks, Kevin. Obviously, it’s an unusual year. So, a lot of thought going into this. We are comping off the 8% SSI. So our internal retail is not showing down that far. And typically, we see our internal estimates and SSI converge as we go forward. And we’ve seen some recent kind of improving revisions from SSI. So what we’re trying to do is triangulate. We’ve also seen from our perspective, internal retail improving again in October. So the trajectory shows us closer to flat, up or down a bit than current SSI shows. And I think SSI will reflect some improving trends, but there’ll be some lag again as we see kind of forward-looking revisions. Across the end of the year, there are some kind of plus or minus dynamics, if you like. There will be some dealers who want to hold any retail inventory they have in their showrooms because at the moment, a lot of them have nothing. So that would be – they may not be inclined to register the retail sale, but others who are more interested in getting cash through the end of the year will be inclined to register the retail sale. But also various companies have different incentives to register retail sales. So we’re trying to take into account those plus or minuses, SSI revisions, our internal retail and the general trends through September and early October. And then 2022, I think 2022, what we’re clearly seeing is incredibly strong raw demand. And we just looked at the – I just happened to look at the first day of Fort Lauderdale, and Boston Whaler retail for the first day was up more than 50%. So there is no question versus last year’s first day of the show. So there is no question that people are really wanting boats, and we expect retail to improve in 2022 as supply chains begin to stabilize and some of the more acute issues that we were experiencing in Q3 and late Q2 begin to alleviate. So we still expect growth in retail in 2022, but it will certainly depend on how much – given the light inventory levels, it will depend on how much the industry can produce.

Great. Thanks very much.

Thanks, Kevin.

Our next question comes from Xian Siew with Exane BNP Paribas. Please, go ahead, with your question.

Hi, guys. Thanks for the question. Maybe just starting, there is obviously a lot of talk about retail sales. But maybe can you elaborate on how the business is maybe a little less tied to sales – retail sales now. P&A is getting bigger. Freedom Boat Club, you have market share gains. So maybe you don’t need as much retail sales growth to be successful. Can you maybe elaborate on that thought?

Sure. I think it’s a great point, and thank you for raising it. Certainly, you’re seeing in our Propulsion business that market share gains are even trumping overall market growth really as a source of units. If you think about the fact that in the third quarter, our Propulsion revenues were, I think, up 60%, I think, versus 2019. So part of the business is growing massively ahead of market, so you’re absolutely right. And then, of course, our increasingly large P&A segment depends on usage, and we’ve seen these usage trends improve. Every boat that goes in the water now has more and more of our P&A and systems and technologies on it. So we’re enriching the fleet, if you like, with P&A over time. And usage profiles have been very strong. One of the slides we included was that slide after we polled our Ripl online community, but the number of people who are voting during the week now, not just the weekend. So usage profile is improving, Seasons have been expanding and will extend again this year. And then, of course, we have Freedom Boat Club, which doesn’t depend at all on new boat sales and is another part of our recurring revenue. As we add new businesses through inorganic growth into both of those areas into P&A, obviously, hugely increase in revenue and earnings from Navico and some of the other recent acquisitions. And as we acquire more territories for Freedom, that exposure, if you like, to new boat sales is – gets lower and lower.

Yes. Just to add, I mean, by the time we close out 2021 and look at ‘22, almost half of our earnings are going to be comprised of the aftermarket P&A business, Freedom Boat Club and the repower business, so the recurring countercyclical businesses we’ve been growing, as Dave said. So that’s a number that should stick into people’s minds because that is a focus of where we’re spending our investment dollars.

Okay, thanks. And then on the supply chain, there is obviously been a lot of talk about supply chain tightness and difficulties on that front. But you guys were able to do 110% of original plan for Propulsion and then 95%-plus for boats. I guess what makes the supply chain, your supply chain, stand out? And how have you been able to navigate it this way?

I think on the Propulsion side with Mercury, it’s the level of vertical integration that really helps us and the fact that we produced a lot of our product domestically and sell it domestically. We’re the only outboard manufacturer producing product in the U.S. So – and that’s where it mostly gets sales. So our exposure to freight and shipping and other things on the engine side is correspondingly lower than some of our competitors. And then if – I’ve said many times, you guys are welcome to visit the Mercury plant. It’s an amazing place. You’ll see crushed aluminum car wheels going in at one end and outboards coming out of the other. That’s how vertically integrated it is. So I think that fundamentally reduces its exposure. And then we have great supply chain teams with a lot of global reach who collaborate to make sure that across our enterprise, we understand what levers we can pull. We have engineering teams that are able to requalify things. So I think a combination of scale, global scale, vertical integration and a lot of great work by our supply chain teams and our engineering teams makes us somewhat more resilient than some of the other people in the sector probably. And we will continue to capitalize on those advantages as we move forward. Certainly, we are – part of our strategy is to vertically integrate more especially on those items that might be more exposed to supply chain disruption. So as we go forward, we will hopefully be – hopefully, the situation will improve overall, but our exposure to it will reduce over time.

Thank you. Our next question comes from Mike Swartz with Truist. Please, go ahead, with your question.

Hey, guys. Good morning. I just wanted to take – just wanted to talk a little bit about maybe pricing, and I think you as well as everyone else seems to be taking some mid-cycle pricing this fall. But maybe talk about the strategy and how maybe you’re protecting or to the degree that you’re protecting your backlogs and retail sold orders with that pricing going through.

Yes. Hi, Mike, yes, we – I think it’s fair to say that because of the amount of our products that we wholesale that are already sold – retail sold at the moment, we are doing a lot less price protecting than we might do in other circumstances. So we have kind of reached some understandings, I think, with our channel partners that there will be pricing changes more frequently, and the extent to which we can protect is limited. So fortunately, I think they are understanding, but we are making sure that those price increases – so for example, we might, in some circumstances only protect a price increase or a price level for a quarter, and then it flows through. Sometimes we won’t even protect for a quarter. So it’s a little bit more dynamic at the moment. And because of that issue with the amount of wholesale that is retailed, we’re doing a lot less price protecting than we would normally do.

Okay. Great, thank you for that. And then another question just give the slide in the presentation just regarding kind of the cost/price dynamic in the next quarter, so I’m just wondering, does that embed any material change in both mix for the fourth quarter? As I look at the third quarter, it looks like it was a little heavier towards your freshwater business. Should we expect that to continue in the fourth quarter as well?

I don’t think that we’re anticipating that particularly. I think some of it is what is the supply chain dynamics. Some of those larger saltwater boats are a little bit more complicated. So they will tend to be hung up a bit longer with some of the supply chain issues. But other than that, I don’t think so. I do think in a kind of connected way, as we look through Q3, we are – at the moment, we have quite a lot of supply start-up costs, if you like, associated with some of the capacity expansions that we’re doing. We’re bringing – we just brought the additional Boston Whaler plant online. We’re bringing Portugal online for capacity expansions, but we’re not seeing yet a lot of volume flow out of there, but we are incurring operating costs. So, some of the capacity expansions will start to change the dynamics as soon as Q4. And I don’t think we’re looking for a material shift.

No, we’re not. And Mike, maybe the other piece of the equation is just overall margin profile. We would expect margins in Q4 to be better than Q3 for the boat business for the reasons Dave mentioned. They may still trail last Q4, which was a really, really outstanding quarter and didn’t have any of the supply chain issues or inflation that we’re dealing with, but we would anticipate growth from – sequentially from Q3 to Q4.

Okay. Great. Thanks for the color, guys.

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

Hi, guys. Good morning. I guess I’ll just follow-up that last comment you made, Ryan, about Boat margins getting better sequentially in Q4. Does that mean that the margin pressures that you’re seeing have peaked here? Or do you think they could possibly get worse in the first half of next year?

Yes, obviously, Joe, and thanks for the question. It’s obviously tough to tell this early. I think we’ve got a lot of things that are helping us in terms of being able to produce more units as we continue to get the capacity on board that Dave has talked about. So we still think there’ll be margin growth next year in ‘22 versus ‘21, but the timing of that probably will be a little bit lumpy just because of the comps and the waning of the supply chain issues, which obviously, if anybody tried to take a guess on when that’s going to happen, we’d all be just doing that, just guessing. But I would anticipate margin growth next year in the Boat business.

Yes. I just wanted to follow-up with Joe on that comment. I mean this is – Q3 was particularly acute for us in terms of a lot of start-up costs for the big new Boston Whaler facility, for the Portugal facility with really limited production. In fact, no production coming out of the newer part of the Portugal facility yet and only limited units coming out of flags. So as those come online, particularly the new Boston Whaler facility in Q4, we will get better absorption. We are seeing as well, I think, some mitigation of some commodity costs. I think steel is down significantly this month. Aluminum is down this month. So we’re hoping that some of those trends will continue. But we do, as I mentioned, have flexibility on pricing if we need to execute on it. We previously said we try and take a long-term view of this. We’re going to cover it over time. But we obviously are very interested in making sure that product affordability is maintained.

Understood. And maybe just a follow-up to next year, you guys have talked about a $9 EPS number, give or take, in the past. Is that still your thinking at this point or have supply chain issues impacted that at all?

No. We didn’t make any additional comments on it in this particular earnings call. We will early next year. I would say that’s – there is no scenario we currently foresee that we will be lower than that. So, I think that you should regard that as a good base for where we are going.

Thanks guys.

Our next question comes from James Hardiman with Wedbush Securities. Please go ahead with your question.

Hi. Good morning. So, we used to always do these sort of bridges between the industry growth number that you guys were looking for and your own sales. Maybe that would be a good exercise here because such – not only is it a big gap, but you downgraded your industry outlook pretty meaningfully. And your sales outlook, it seems like, at least on an organic basis, is unchanged. Maybe help us figure out how you are able to accomplish those two things at the same time?

Yes. Hi James, I don’t know if I can fully bridge it for you, I will be honest. I would say that our internal retail is tracking ahead of SSI. And SSI recently has generally revised up its numbers as it kind of moves through the year and probably now as it moves into 2022. I do think we have dealers that are very busy doing a lot of stuff and not necessarily registering boats, and so that will catch up over time. We have gained some market share, but we don’t think that’s enough to bridge the difference. It’s some of it, but not all of it. And so we have to wait, to be honest, a little and see what happens with the SSI going forward. So, we can bridge a bit with market share. I think we can look at our internal retail. We know what that is. We just don’t think that market share gain is covering all of it. We certainly did, as you said, change our view of the U.S. market retail based on just lack of available product, which we didn’t imagine would be such an issue with sales in Q3. So yes, you are correct. We certainly revised that. But I would say, internal retail is continuing to show more positive than SSI.

Is it safe to say that maybe how you guys are getting to your numbers are a little bit lighter on units and a little bit heavier on ASP at this point, just given the supply chain challenges and what that does from a pricing perspective?

Well, yes, I think we – as we mentioned on a just a unit basis, we will likely finish the year above 95% of our initially planned production and probably on the engine side, 110% or more. So, there isn’t a huge bridge for us in terms of – I mean, obviously, ASPs are going up, but I don’t think that’s a massive difference.

Okay. And then my second question, so you wholesaled 8,200 units in the third quarter. I think the number you gave us in the second quarter was 9,400. Could we just read that as that is the supply chain impact on your production? And how should I think about that going forward? I think you said that – I mean, that the units that went into, I guess corporate inventory, right, the unfinished units. Do you expect to release all of those in the fourth quarter, or does that hang over work its way into 2022?

So, I think on the first part, there is a natural reduction between Q2 and Q3. That’s not just supply chain disruption. Essentially, we take some downtime in July where we do new model launch changeovers. And so we essentially make ourselves less efficient in Q3 by changing over model lines. And most of that occurs in July so that – and then there are – we have fewer production days because of holidays. So, I would say that some of that difference is supply chain and some of it is natural. We – I think both group will, if I recall, launch 80, either new or upgraded models, this year in 2021. So, the impact of those changes going through the system, mostly in July, is part of that difference. And then I am sorry, the units – we still have units that are unfinished. Obviously, we will be doing our best to get those out the door. I would say it’s probably likely that at the end of the year, we will still have some units in that situation. Although I would say, obviously, we will be making – we will be doing everything we possibly can. The demand is really high at the moment. I said in another meeting, it doesn’t matter if the boat has 1,000 parts or its 10,000 parts. If you are minus one part, then it’s the same effect. So, the boats that tend to get hung up are the more complicated boats. And obviously, we want those out of the door. So, we will be doing everything we can, but it’s realistic to assume we won’t get everything out.

Got it. Very helpful. Thanks.

Thank you, James.

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

Hi guys. Good morning. You had talked about some expected mix headwinds on the propulsion side of the business in the back half of the year. It sounded like that came in better than expected here in the third quarter. I was hoping you could touch on where you saw the disconnect and whether or not we should expect sort of a catch-up here in the fourth quarter?

Yes. I think we have – our dynamics on mix in the propulsion business depends a lot on whether we are supplying to large OEMs, smaller OEMs, dealer channel, international. You saw that international growth was pretty strong. And so the mix there is good. You saw that we are gaining share in saltwater. So, those are I think, are pretty secular. And we saw very strong demand for repower as well in this quarter. I think it will fluctuate a bit over time as the dynamics of supplying OEMs and others changes, but generally, it’s on a secular growth path over time. As Mercury, it continues to be the propulsion of choice. Obviously, we are able to price for that technology. So generally, it will continue to improve, but we will see some dynamics over time.

Okay. And then you had made a comment about favorable weather as a tailwind on the aftermarket side into the fourth quarter. I know that that’s always an area where there is a fair amount of seasonality, also going to be some noise from Navico. But can you just sort of help us think about the sequential seasonality from 3Q into 4Q for that business this year versus what we might see in a normal year?

Yes. I mean, Fred, this is Ryan. P&A, obviously change is based on usage of the product. I think what we saw certainly in the Midwest was a pretty nice September and in October, and that leaves boats on the waters a little longer and pushes some sales – some service into the winter months. We saw a very similar track last year with a good fall and therefore, P&A pretty strong in Q4 and even Q1. So, I think we have embedded that into our guidance, but we – it is a little bit of favorability as we close out the year.

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

Hi. Thanks for taking my question. It’s nice to hear that price actions taken so far seem to have not impacted demand. As we think about 2022 and contemplating further actions, I guess, what stop gaps do you have in place to not overshoot with increases and ensure that demand isn’t affected?

Yes. So, good question. I think we have consistently said that we are trying to balance mitigating inflation with a long-term view of the market and making sure we get new people into the marketplace, which we have been very successful at and keep people in boating. So, I think what you have seen is take a very – is modulate our pricing to make sure we don’t get too far ahead of inflation. It would have been easy to take a large chunk of pricing in the middle of this year and try and get ahead of everything. But of course, that risk is either losing share or losing buyers in the market as a whole. So, we have reached agreements with our channel partners around how we will approach price increases. And we will be making sure that we continue to balance maintaining affordability with covering inflation.

Okay, great. Thanks.

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

Yes. Thanks. So, just to stay on trend, I am committed to working from my boat at least once next season. Thanks for the laughing. So, I guess the question is on Navico. And I m wondering if you have had conversations with some of your OEM partners and what their receptivity might be to a more integrated solution as you bring all of those accessories and components to the OEM partners?

Yes. Thanks, Craig. I think the reception of our acquisition to – our acquisition of Navico has been very strong from all of Navico’s customers and Brunswick’s customers, too. So, I think they all see the opportunity there. We certainly have been – are being increasingly successful with delivering integrated solutions, both from the Mercury perspective and also from the Advanced Systems Group, ASC Connect perspective. You will – I can’t mention names, but for some OEMs, we are now on site and the majority integrator of their products. So, we are having a significant impact in the marketplace. And of course, every time we do that, there is an opportunity to introduce more of our expanding product line as we go. Obviously, we have to balance that with making sure that we are flexible as people want to continue to select their brands. But certainly, that is a favorable opportunity, a very favorable opportunity for us.

And as a follow-up, Ryan, to you, with your stock at basically 10x the number you hope to reach next year and even the contemplation of a buyback tax that’s been announced in recent days, how aggressive could you be in the fourth quarter with respect to your stock?

We could be quite aggressive, Craig. I think most people know that we have a pretty standard buyback formula that we look at. And as the market corrects and certainly as our stock is severely undervalued, as I think we all believe, we will be very aggressive. And that $120 million number that we put in the deck certainly can go up from there if the situation allows. We have a significant authorization, so that’s not an issue at all.

Great. Thank you.

Thank you. And our next question comes from Joe Spak with RBC. Please state your question.

Thanks. Good morning everyone. I was curious if you have any exposure to some of the magnesium or aluminum shortages. I know a lot of that is sort of more China based. And I think at least for the U.S., that’s probably sourced more locally, but I know in Europe, they get a lot of their magnesium from China. And I believe that’s used on boats, especially freshwater for corrosion, but maybe I am wrong there, so any color you could provide would be helpful.

Yes. So, magnesium is a constituent in some of the alloys that we use. We have not seen a major impact from it. I was pleased to see aluminum price, I think down 5% in the last month. Steel is down 20%. I think in the last month, lumber was down a long way. So, I think some of those trends are moderating. We do as a – Mercury, which is a big user of aluminum in its outboard engines, does have proprietary formulas, but also takes a lot of its product from the recycle or scrap market. In fact, almost all of it, which tends to be more protected than the virgin markets. So, I would say that clearly, we are seeing some of this. It is moderating and we are not overexposed to magnesium.

Okay. And then, Ryan, just on your own inventory, that’s up higher. I think you made a comment that you are building some to – because you want to be able to build to meet demand. But is there like a new normal here on how you manage your own working capital to – given what we have seen happen in supply chains over the best year, where you want to keep more parts on hand and also as your business mix, I guess moves a little bit more towards P&A, it seems like maybe you would also keep a little bit more inventory, but any commentary there would be helpful.

Yes, Joe, that’s actually a great question. And we spend a lot of time on it. Obviously, the net inventory number, it’s kind of up, call it, $350 million or so September-over-September versus last year, but it’s all related to exactly the factors you laid out, primarily P&A inventory that we want to make sure we have on stock and ready for the off season as folks are winterizing their boats. It’s higher rods and whips in our facilities so that we don’t get in a short supply situation. And it’s just a little bit of a rebuild from a time in last September where we were frankly under-inventoried. And so yes, as I look around our businesses, I have zero concerns about having too much inventory. And we may allow a little bit more to be – to sit around as we enter the retail season just so that we are able to maximize our production. The one thing I do want to make very clear is we don’t have a whole lot of – hardly any finished boats that are sitting in our facilities. As most people know, as soon as those boats are finished, they are sold to the dealer. And right now, 40% of them go right to a customer. So, when you see that finished good number of kind of $150 million, a very, very small percent of that is boat. The rest of it is propulsion and P&A.

Appreciate it. Thank you.

Thank you. Our next question comes from Tristan Thomas with BMO Capital Markets. Please state your question.

Good morning. Good afternoon. I think you kind of alluded to this before, but could you maybe provide context around the pricing dealers are taking on top of the pricing you are taking?

Well, I think the kind of retail pricing is obviously covering the pricing that we provide, and then the promotional environment is obviously very favorable. I don’t think there are many retail discounts around at the moment. So, I would say generally that prices are transacting closer to MSRP than they might normally do. I have not seen certainly examples with our channel of kind of predatory pricing or gouging or anything. I think everybody believes that the right thing here is to make sure we cover our costs and make sure we keep the consumer in the market.

Okay. And then just one more question. Your – the 80% of 2022 calendar year production, that’s wholesale sold, right? So, I was just wondering what – how many of those have a customer name attached to them?

Yes, we have been running in the 30 to 40 percentage range typically of the wholesale sold. I think that’s probably close.

Okay, great. Thanks.

Thank you.

Thank you. And that concludes today’s question-and-answer session. I will now turn the floor back to Mr. Dave Foulkes for closing remarks. Thank you.

Thank you very much. Thank you all very much for joining us on the call today. We continue to appreciate your interest in Brunswick. We are very, very excited about our very strong operational and financial performance and our continued strong success and pace in executing on acquisitions. They are – continue to be very consistent with our strategy and really reshaping the business for resiliency and future relevance and of course, broader success with new customers. With the new acquisitions, we are welcoming more than 2,000 new people into the Brunswick family. And they come with skills and experience that is very relevant for the future, a lot of software engineers, a lot of people in digital that are positioning us really well for the future. I mentioned earlier, it’s very early in the Fort Lauderdale Boat Show. But on the first day, it looked very strong. Initial reports are consistent with recent shows that Mercury has kind of in the mid-50% of total outboards on display. And from what we can tell, our brands had a very strong start to the show. So, we are excited. I think that reflects not only on the strength of our brands, particularly Mercury and Boston Whaler and others, but also on this incredible raw demand that we see propelling the business forward into next year as well. Thank you all very much.

Thank you. This concludes today’s conference. All parties may disconnect. Have a good day.