Release Date: July 25, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Brunswick Corp (BC, Financial) continues to gain market share in outboard engines, holding over 48% of the US market.
- Recurring revenue businesses, including engine parts and accessories, Freedom Boat Club, and aftermarket sales, contributed more than 50% of Q2 adjusted operating earnings.
- Strong cash flow enabled $170 million to be deployed for share repurchases year-to-date.
- The engine parts and accessories business had a strong quarter, with sales and operating earnings up versus the second quarter of 2023.
- Freedom Boat Club continued to deliver steady membership sales growth, adding two more flagship locations in Denmark and the UK.
Negative Points
- Second quarter results were slightly below expectations due to high interest rates and suppressed discretionary spending.
- Full year unit retail sales are now expected to be down approximately 10% versus the original forecast of flat.
- Higher levels of discounting and carrying costs have increased pressure on dealer and channel partner profit margins.
- Navico Group had lower sales and operating earnings versus the second quarter of 2023 due to reduced marine OEM order rates and persistently slow RV orders.
- Adjusted operating earnings were down versus prior year due to the impact of lower net sales and higher manufacturing costs.
Q & A Highlights
Brunswick Corp (BC) Q2 2024 Earnings Call Highlights
Q: Can you provide a high-level update on how you're getting to the 10% retail number now, given the state of the macro environment?
A: Through Q1, our internal retail was about flat, slightly ahead of the market. In Q2, we saw a weaker May, down about 8-10%, and June was down about 20%, aligning with SSI. Given the uncertainty, we think a 10% decline is reasonable. July is better than June, down mid to high singles, which would still give us high singles to 10% decline by year-end.
Q: Thinking about the dealer inventory target for year-end, you mentioned a 7% decline. How do you think about the setup for 2025?
A: We are approaching year-end with a conservative view on inventory, aiming to de-risk any reasonable scenario for 2025. Inventory levels are balanced across segments. By year-end, value products will be relatively down, and premium fiberglass will be up slightly, which is necessary as we were under-inventoried in those segments.
Q: Is there any way to think about the initial dealer volume commitments for your model year 2025 product compared to last year?
A: More than 70% of our planned production for Q3 is accounted for with orders, which is relatively normal. Brands like Boston Whaler are 100% accounted for, and aluminum brands are also performing well. We are comfortable with our position for Q3 orders but know less about Q4 at the moment.
Q: Can you elaborate on more recent trends in the marketplace, particularly across premium versus value channels?
A: Premium is still somewhat stronger than value. Fishing-related products, from high-end Boston Whaler to aluminum fishing boats, are relatively strong. General-purpose recreational products, like value fiberglass runabouts and pontoons, are performing weaker. We are strongly indexed to fishing, which continues to favor us.
Q: What are the best EBIT flow-through rates or incremental margins to consider for 2025, given the reductions in operating expenses?
A: We believe we can lever up incrementals at 20% or more. For 2025, assuming healthier economic conditions and a stable marine market, wholesale could exceed this year's levels by 10% or more. Mercury will continue to gain share, and engine P&A will show stability and growth. Navico will see improvement with cost take-out actions and new products.
Q: How does the current floorplan interest cost for dealers compare to prior periods?
A: Dealers are paying SOFR plus a percentage, up seven points since 2021. Despite this, the dealer network remains healthy, with aged inventory decreasing and good liquidation of older units. We monitor dealer health closely and see no concerning trends.
Q: What is the current expectation for Navico's margin profile if the market returns to 150,000 boats?
A: We are working diligently on cost reductions, including closing 40% of facilities and reducing headcount. Cost of sales improvements will start to flow through with new products. Despite a tough OEM environment, aftermarket sales are doing better, and we expect margin improvements as these changes take effect.
Q: Regarding the retail inventory target reduction of 7%, do you think that's enough relative to a 10% retail decline?
A: We consider multiple factors, including weeks on hand, units in the field, and units per dealer. We aim to balance these factors, significantly under-shipping retail this year while maintaining a decent number of units per dealer. Premium products like Boston Whaler and Sea Ray will see slight inventory increases as we were under-inventoried in those segments.
Q: Is the propulsion segment becoming more correlated to new boat sales, and how is pricing holding up?
A: The decline in propulsion is primarily due to lower OEM volumes, not pricing. Repower sales remain strong, and we continue to gain market share, especially in high-horsepower engines. Pricing remains robust, particularly for high-horsepower products where we are the market leader.
Q: Can you provide more color on the margin guidance for the propulsion segment, given the steep decrementals in the back half?
A: The lower margins are due to volume declines and higher absorption costs. Depreciation is also higher due to recent capacity projects. However, at normal production volumes, the propulsion business can achieve or exceed 20% operating margins. The current impact is primarily due to lower production volumes and associated costs.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
