BC - NYSE

Good morning. Welcome to Brunswick Corporation's Third Quarter 2023 Earnings Conference Call. All participants will be in a listen-only mode until the question-and-answer period. Today's meeting will be recorded. If you have any objections, you may disconnect at this time. I would like to introduce Neha Clark, Senior Vice President Enterprise Finance Brunswick Corporation. You may begin.

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

Thanks, Neha, and good morning, everyone. Our businesses delivered a solid third quarter as continued market share gains, strengthen new products, efficient operations at our facilities, comprehensive cost control measures and the resilient composition of our portfolio drove strong earnings and free cash flow despite the ongoing challenging macroeconomic backdrop. We delivered $1.6 billion in net sales and slightly stronger-than-expected adjusted earnings per share of $2.42 in the quarter in the upper half of our guidance range. We also generated strong free cash flow of $143 million in the third quarter, resulting in free cash flow conversion of 84% and delivering year-to-date free cash flow $233 million higher than prior year. In addition, we continue to be aggressive with share repurchases, executing $220 million of repurchases year-to-date. Mercury Marine has continued to capture solid market share gains this year with U.S. outboard retail market share up 90 basis points year-to-date versus prior year. The new bulk market is on pace to finish generally in line with our estimates of down high single-digits, and Brunswick brands continue to outperform the market. As we move out of the core season, we continue to actively manage our global boat field inventory levels, and we closed the third quarter with 32.8 weeks on hand. We're working closely with our marine dealers and channel partners to maintain balanced inventory levels exiting 2023, targeting being generally in-line with historical norms which allows each location to carry a good representation of our model portfolio while avoiding overstocking. In addition, we're providing strong but targeted promotional support for retail, investing in new products and technology, progressing our operational excellence goals and implementing structural cost reduction actions across the enterprise. I'll now turn to some of the segment highlights for the quarter. Our Propulsion business delivered top line growth with slightly lower earnings versus a record third quarter 2022, driven by growth in outboard engines, especially in high horsepower categories and controls and rigging, offset by relatively weaker sterndrive sales. Mercury gained 130 basis points of market share in high horsepower outboard engines over 150-horsepower versus 2022 as additional production capacity came online. During the quarter, the business also successfully ratified a new five-year collective bargaining agreements with the union representing workers at its engine production facility in Fond du Lac, Wisconsin and, in addition, continued strong production of Avator electric outboards, with 4,000 units manufactured to-date. As we move into the off-season, Mercury is seeing some slowing of OEM orders as the OEMs scale back production to control field inventory going into 2024. We expect OEMs to remain cautious as they assess customer sentiment at late 2023 and early 2024 boat shows. While this is a short-term headwind, it is allowing Mercury to gain share in the repower market, especially in high horsepower engines. Our Engine Parts and Accessories Business demonstrated steady performance in the quarter, reflecting an improving sequential trend. Sales for the products portion of the business were up 4% versus prior year as consumers use their boats in the primary season. Distribution business sales were down year-over-year, which showed relative improvement from earlier in the year as dealer and retailer inventory destocking patterns moderated. Overall, segment sales were up 24% versus the third quarter of 2019. As anticipated, Navico Group posted higher gross and operating margins versus third quarter 2022, despite lower sales. A slower marine and RV OEM orders offset improving trends in aftermarket channels. Retailer stocking is recovering as we move into the fourth quarter, with well-received new product offerings driving strong retail pull-through as we enter the holiday season. Additionally, acceleration of planned restructuring efforts continues to result in reduced operating expenses versus prior year. Finally, our boat business performed to plan, continuing to introduce new models and white-space brands, and gaining share, while adjusting production to manage pipelines. The recently launched Navan premium adventure brand is nearly sold out for model year 2024 and the refreshed Bayliner brand has also been well received. Freedom Boat Club continues to grow memberships and now has 400 locations and nearly 60,000 membership agreements covering more than 91,000 members network-wide, all while generating exceptionally strong synergy sales across our marine portfolio. Shifting to external factors, stabilizing factors include strong employment, moderating inflation and a reduced pace of interest rate increases, however, despite the promotional environment and stable boat purchase consideration, higher prices, high interest rates and credit availability remain strong headwinds for consumers. On a positive note, boating participation remains strong. Despite a fairly strong main selling season in 2023, buoyed to some extent by promotions, going into the off-season, dealers are healthy but anxious to avoid holding excess inventory ahead of an uncertain 2024, and will also be closely monitoring customer behavior at upcoming and early 2024 boat shows. With field pipelines replenished, boat OEMs are reducing production rates by taking out weeks of production or shifts in Q4 to align with anticipated retail in 2024, resulting in lower order rates for Mercury engines and Navico Group OEM products. The order softness continues to be greater for smaller, value boats and lower horsepower engines, with larger, premium products not immune but continuing to display relative strength. Given these factors, we are maintaining production discipline which may add pressure in the short-term but will set up for a more predictable first half of 2024. Shifting now to a global view of revenue in the quarter. Overall, we saw a 7% sales decline on a constant currency basis. Year-to-date, the U.S. market is showing relative strength versus international markets, with sales relatively flat to 2022. U.S. new boat industry retail was flat in the quarter versus 2022 with year-to-date retail generally in-line with expectations of down 7.5% versus 2022, and Brunswick growing share in both periods. Overall, year-to-date, Brunswick has performed better than the industry, picking up share particularly through strong performance by our pontoon, premium fiberglass and tow brands, supported by planned promotions and marketing on select product-lines. Outboard engine industry retail units were up 3% in the third quarter versus prior year, bringing year-to-date unit retail to down 2%. Mercury continues to outperform the industry with third quarter share gains of 160 basis points in greater than 30 horsepower categories. We are actively managing boat pipelines to achieve year-end levels within historical norms and are exiting quarter three with global weeks on hand at a healthy level of 32.8 weeks. We anticipate ending the year with U.S. pipeline levels in-line with expectations at approximately 36 weeks and approximately 14,000 units versus approximately 35 weeks and 16,000 units on hand at the end of 2019. As is normally the case, international boat pipelines will be higher. Let me shift now to discuss some exciting new growth opportunities across our businesses. We are thrilled to add Flite to our portfolio of brands and product categories. E-foiling is an emerging and disruptive activity that allows for an extended, hours-long surfing experience on inshore or coastal waters without the need for a wake boat or sail-assistance, and Flite is the premium brand in the space with high market share. The Flite team has already extended its product line to an easy-to-ride scooter and has many further developments in the pipeline. Through Mercury Marine and Brunswick, Flite will have access to manufacturing and product technology, and the world’s largest marine distribution network. As I mentioned earlier, we recently launched our new premium adventure brand and product-line, Navan, at the Cannes International boat show. This class of boat is very popular in Europe and gaining popularity in the U.S., and the two initial products, which have begun serial production are nearly sold out for the 2024 model year. The media reception has been very strong and the new models has been nominated for Best of Boat and European Powerboat of the Year 2024 awards. You may also have seen that just a few days ago we announced Brunswick Finance, an online retail finance solution that can be integrated into Brunswick and dealer partner websites to provide rapid customer finance approvals in addition to supporting promotional financing. We are beginning to roll-out this solution in Q4. And, finally, Freedom Boat Club continues to expand rapidly in the Australian market, recently announcing its seventh location. We see the AN

Thanks Dave, and good morning everyone. As previewed at Investor Day last month, Brunswick delivered a solid third quarter despite softening market conditions throughout our businesses. When compared to the record prior year, third quarter net sales were down 6%, and adjusted EPS of $2.42 decreased 9%. Net sales in each segment benefitted from annualized price increases, market share gains, and benefits from well-received new products, offset by lower wholesale orders resulting from field inventory reaching normal levels and softer retail market conditions. Operating earnings and margins were down versus prior year as the impact of the lower sales, slightly higher input costs, higher absorption, and the unfavorable impact of foreign currency exchange rates, more than offset benefits from aggressive cost control measures throughout the enterprise. Lastly, we had a strong free cash flow generation in the quarter of $143 million, primarily due to stronger working capital generation, resulting in a free cash flow conversion of 84%. Year-to-date results also remain solid despite the uncertain macro-economic environment. Sales are down slightly from the record 2022, with stable adjusted operating margin and EPS resulting from prudent operating expense control across the company, steady gross margin performance, and in the case of adjusted EPS, continued aggressive share repurchase activity. Our strong free cash flow performance is significantly outpacing prior year, reflecting our continued focus on driving cash in this challenging market. Now we’ll look at each reporting segment, starting with our propulsion business. Revenue was slightly up versus the third quarter of 2022 as benefits from a favorable product mix related to continued strong high-horsepower outboard engine demand and higher sales to repower customers, together with annual pricing, were partially offset by order declines in the low and mid-range horsepower outboard engines and sterndrive product. Operating earnings decreased versus prior year due to lower sales, higher input costs, including expenses related to the successful ratification of the Mercury Fond du Lac labor agreement, and the unfavorable impact of foreign currency exchange rates, which more than offset the benefit from cost control measures. As Dave mentioned earlier, as we exit 2023 and enter 2024, we anticipate that we will continue to maintain our progressive market share gains, but that our propulsion business will be impacted by additional boat OEM production reductions that may not abate until the start of the primary retail selling season in 2024. This will enable us to sell more engines into the dealer channel, but the overall impact will still be a decrease in market demand for engines. The engine parts and accessories business continues to improve sequentially throughout the year, with Q3 sales down 4% versus 2022, but up 24% over the third quarter of 2019. The high-margin Products business grew sales by 4% versus prior year, and by more than 10% in the United States. Distribution sales were down 10%, but trends continue to improve from earlier in 2023. Segment operating earnings were down versus prior year due to the slight sales decline and transition costs related to the newly opened distribution center. Note that October orders in both the Products and Distribution businesses continue to trend positive as boat usage remains strong and customers in Northern climates begin to winterize their product. As anticipated, Navico Group had an improved third quarter as aftermarket channel steadiness helped offset expected softness in marine and RV OEM customers. Segment sales were down 9% due to these sales dynamics, but adjusted operating margins were up 110 basis points and adjusted operating earnings were up 3% as benefits from accelerated cost reduction actions and reorganization efforts, together with strong new product performance, more than offset the impact of lower sales. The fourth quarter is an important time for the Navico business as the holiday season drives aftermarket retail sales, and we will continue to watch not only consumer health and desire to spend for the holidays, but retailers’ wholesale reordering patterns at a time where inventory levels are normalized. Finally, our boat business performed to plan, continuing to introduce new models and white-space brands and gaining share, while adjusting production to manage pipelines. Sales were down 16% versus Q3 2022 given the production reductions, together with continued elevated discounting to drive end-of-season retail. Adjusted operating margins and earnings were down primarily due to the lower sales, partially offset by focused cost reduction activities. Freedom Boat Club, which is included in Business Acceleration, had another solid quarter, contributing approximately 9% of the boat segment’s revenue during the quarter while seeing very steady membership levels despite the macro-economic uncertainty. Although we’re entering the off-season in most of our primary selling regions, we are focused on demonstrating resilient EPS and cash flow in a challenging market while constraining our pipelines to appropriate historical norms and delivering against our strategic initiatives. The ongoing uncertain market conditions are resulting in measured ordering patterns by our retail channel partners and reduced production schedules with our Marine and RV customers, but we continue to target marketing and promotional activities on select products to support retail sales while remaining steadfast in balancing inventory and pipeline levels. As a result, and as previewed at Investor Day, we anticipate revenue of $6.45 billion to $6.5 billion, adjusted operating margins of approximately 14% and adjusted EPS of approximately $9. We continue to see positive free cash flow conversion and working capital trends and still anticipate generating more than $375 million of free cash flow for the year. Lastly, we also have two full-year P&L assumptions that we have updated. First, given our continued strong cash flow performance and recent further Brunswick share price dislocation, we are increasing our repurchase target to exceed $275 million of repurchases for the full year. As a result, we anticipate slightly lower average diluted shares outstanding of approximately 70.25 million. Second, with the strengthening U.S. dollar, we now anticipate a slightly larger full year foreign exchange headwind of approximately $35 million. I will now pass the call back over to Dave for concluding remarks.

Thanks, Ryan. Before we close, I wanted to share some examples of recent recognition Brunswick has received for our people, business, culture and products. We're on pace for over 100 major awards this year, an all-time record. For the fourth consecutive year, Brunswick was named to Forbes list of the world's best employers ranking in the top 30% of the 700 companies that made the final list. This award is a testament to our enduring commitment to being an employer of choice and creating a world-class environment for our global employees. Brunswick has also been named in Newsweek's inaugural list of the world's most trustworthy companies, reflecting our commitment to integrity, safety and quality in our business and was named one of America's greenest companies, reflecting our numerous sustainability initiatives and commitment to further improvement. Finally, our products continue to be recognized for excellence on the global stage. I already mentioned our success with Navan, but Boat Group's new Sea Ray SPX 210 also won the Moteur Boat Magazine Award for Best Boat below 7 meters at the Cannes Boat Show, further evidence of our commitment to leading the way in new products and technology across our businesses. Thank you again for joining the call. We'll now begin the Q&A.

Thank you. [Operator Instructions] Our first question is from Megan Alexander with Morgan Stanley. Please proceed.

Hi, thanks for taking our questions. I guess maybe you did give some commentary on 2024. Could you maybe just update us on your base case expectation for a flat retail boat market next year?

Hi Megan, yes, I think, yes, that's still our base case assumption. I think but obviously, as you've seen, we're trying to match and I think achieving a good match between wholesale and retail as we go into next year. I think basically, the assumption really is obviously, we're enough for a start, we're at overall retail levels that are more like 2014. So we've been pulled down about 30% since the peak. I think the other thing that leads us to that conclusion really is that the prevailing consumer conditions for most of the selling season this year, we would expect to be pretty similar next year. Price – the price increases that happened have really already incurred. So pricing is now very similar to historical levels, interest rates, we don't see rising too much more, if it’s all, on balance during next year. So also next year, we were – Q1, we were not as heavy on promotions as we were later in the year. They seem to be pretty effective. So I think a combination of consumer conditions that are pretty similar to this year, probably some increased promotional activity from us in the first quarter to kind of recognize where the market is, leads us to believe that that's a reasonable baseline assumption. Of course, it could be different for various reasons. I would say on top of that, the market obviously is not behaving in a homogenous way. We still are seeing more resilience in the premium end of the market. And actually, interestingly, just feedback from the first day in the Fort Lauderdale Boat Show, sales are strong in the first day. That's obviously a premium show. So that was encouraging. So those are essentially some of the components that go into our assumptions.

Okay. That's helpful. And maybe a follow-up, if that's still the case. Can you maybe talk through some of the puts and takes just on the margin line and then maybe getting to the bottom line. You talked about maybe having some destocking in Boats and Propulsion, but you are lapping some significant headwinds in Navico and P&A, which also seemed to be improving. I know you also talked about some interest expense headwinds, but you're driving strong free cash flow. So is the $9 that we're looking at for 2023? Is that the right floor to think about as a base case for next year?

Hey Megan it's Ryan. I'll go ahead and take this one. And taking in reverse, I'm not sure we know enough today in October to say that $9 a share would be a floor, but it's certainly in the set of possibilities or a set of outcomes for next year. So we'll just have to wait and see what the next handful of months bring us before we give more definitive 2024 guidance, but definitely $9 is in the competition set. The puts and takes, I think you had several of them. I think on the plus side, parts and accessories is really performing kind of as we thought it would. Historically, I think there was some year-over-year comps that spooked people on Engine P&A and now that we're back to kind of normalized comps, you're seeing that business grow at a low to mid-single-digit percentage kind of quarter in, quarter out both sequentially and year-over-year. So as we get into next year, I think you're going to see goodness on the margins due to Engine P&A business. I think you'll also see growth on margin on Navico. I think we've been pretty planned that Navico is probably near or coming off of its trough position on margins and all of the reorganization and good work that they've done, you're going to get a full year benefit of that as you move forward. I would say that the interest piece is obviously real. We're going to have to refinance our notes that are at 0.85% sadly, but we'll be smart and try to minimize the impact there. But the combat that will also continue to be very aggressive on share repurchases given where we're trading today, I think that's something that, obviously, on the EPS line, it will help on the margins, but that will be a good benefit there. So across the line, I think we see retail matching wholesale, which have been pretty clear about some really strong movement in the P&A businesses in Navico and probably offset a little bit of difference in wholesale, retail and Boat and Propulsion. And that's how you get on margin. It's pretty sustainable even at 2014, 2015 retail levels.

Really helpful. Thank you. I appreciate it.

Our next question is from James Hardiman with Citi. Please proceed.

Good morning. Thanks for taking my call. Ryan, that was really good color. I want to, as you can imagine, dig even further on some of that. As I think about your Boat Business, where do we think the delta between wholesale and retail will finish this year? I mean, obviously, there was some replenishment earlier in the year. And I'm just trying to, trying to figure out what sort of a headwind that represents as we look to 2024. I get to about a 3,500 unit headwind, about 10%, is that in the neighborhood to high, to low?

Hi, James, thanks for your question. I think Ryan and I will kind of tag team it. I think in the U.S., we produced 2,000 or so units more wholesale than we did at retail. So but I would say they probably almost entirely value units, so a different mix in terms of dollars. So that obviously represents a headwind as we go into next year, but not a huge headwind. I would say particularly the cost takeouts that we've done across the enterprise, including in the Boat Group, were progressive through this year and so there were a higher impact in Q3 and Q4. So on a kind of run rate basis going into 2024; we should have some cost benefits there, Ryan?

Yes. No, that's correct. Nothing to add.

That's helpful. So suffice it to say, I again, we're going to learn a lot more three months from now, presumably, it's going to be real hard for the Boat segment to grow the top line. I guess in previous conversations, and you talked a lot about P&A, Engine P&A and Navico. I guess what's your level of confidence that propulsion can grow next year. That's the one where it seemed like at least previously, you had the highest degree of confidence that through hell or high water that, that segment would be up on both the top and bottom line. Where do you stand here today? And what will allow you to sort of outgrow an unpredictable market next year?

I think the market share gains continued – so we clearly have a secular trend on top of some cyclicality here. I would tell you that at the Fort Lauderdale show, Mercury had 57%, I think, share overall, but close to 70% share of engines on the water, which is by far our best showing. And as you know, that is a nice kind of proxy for new boats coming out and where Mercury share might be headed. So I think the secular trends supporting Mercury high horsepower continue to be extremely strong. Of course, in the end, it depends exactly on how the market performs next year. But I would say premium boats generally have higher horsepower engines continues to be strong, not just domestically. We're also seeing the same thing in Europe, where our higher horsepower customers with more premium boats are also the strongest. Very difficult to see exactly how the business [ph] all going to net out. But generally, we remain very constructive on that. And we have continued to gain share in repower as we’ve had capacity available, continue to convert OEMs, both new OEMs, but also greater share on existing OEMs. So I think in the end, it's going to depend on how all of these things net out, but I think we have a lot of positives as well as some potential negatives.

Okay. And so just to clarify, it seemed like previously you were real confident that Propulsion would grow next year. Now it sort of sounds like depends sort of uptake as we sit here. Obviously, with a lot more data to come in. Is that accurate?

I think I would say that the – on a I think that the – all of the things that are constructive trends on a secular basis for Propulsion are still in place. This is really a is the market going to be slightly better than we assumed or slightly worse than we assume? But I would say that we're very confident that the investment in high horsepower and our overall performance in high-horsepower will yield share gains. I don't exactly know, how that's so good and that's out next to you. But Mercury will end up stronger by the end of next year than it is at the end of this year, I think.

And probably the other good news is we have done our investment. We've done the investment on the capacity. We've done our investment on new products. There'll still be other things, but we're now at a time where we can harvest those investments and really use them to gain share here moving forward.

Got it. Appreciate the color. Thanks, guys.

Our next question is from Xian Siew with BNB Paribas. Please proceed.

Hi, guys. Thanks for the question. On inventories, you mentioned weeks on hand, you expect to exit the year at about 36 weeks, which is pretty much in line with 2019 and 35%. But I guess given higher floor plan financing, higher ASPs and maybe kind of an uncertain retail market. Do you think like that on hand should be actually lower than 2019? Or how do you think about – how do you think about that?

Yes. I think we've – I think we've had this kind of back and forwards for a while. What we have always been saying that in the 30s is probably where weeks on hand needs to be, especially at a lower market level. So dealers have a representative selection of our portfolio. On a unit basis, it is lower than 2019, 14,000 units versus 16,000 units. And that is a reflection, obviously, of the overall retail level, but could be, to some extent, the floor plan financing availability and credit limits and that kind of stuff. I don't see that as a significant issue for us at the moment. I think overall, the predominant desire and alignment between us and our channel partners is to just get the inventory level right and I don't think that there is a specific issue with credit limits or kind of dollar value of inventory that's really prevailing at the moment. I think if you think about it, if retail is flat, obviously, that is 36 weeks on a trailing basis on a forward-looking basis, which seems to us to be extremely appropriate. And the ability to kind of land the plane after a year like this with $9 of EPS and inventory in line. It's not a bad trick, to be honest. So I think that – I think we feel very comfortable about it.

Okay great. That makes sense. And then maybe on Propulsion guidance, a bit lower on revenues, but margins were maintained. Maybe can you walk through some of the bridge to hold the margin?

Yes, I can take that one. The Propulsion Business is larger today as it is has several levers to be able to pull certainly in terms of OpEx, but it starts with the gross margin line frankly. And there, they continue to hold gross margin steady, if not a little bit up even despite volume. And Xian, that's mainly because of the strength in the high horsepower. So there's also a bit of mix in there. Obviously, dealer orders were really strong in the quarter, and that comes with a little bit of premium on the earnings front as well. We had a little headwind in currency in the quarter, and we're hoping that, that abates a bit as we kind of run out the year. But really, that's a – those are the biggest pieces.

Yes, I just noted we obviously had the one-off issue with a security incident this year, which obviously was an absorption issue for a period.

That's right.

Okay, great. Thank you guys, good luck.

Our next question is from Craig Kennison with Baird. Please proceed.

Hey, good morning. Thanks for taking my question. I wanted to revisit I guess, your base case for retail next year. I know it's early. But certainly, in my mind, retail being flat next year would be fantastic and well above what I think the market may expect. I would note that Patrick, which is a supplier to this industry, just sit on its call, they have an expectation for a 15% decline next year, and I know they cater to a lower end, but still a pretty wide gap there. So I guess, my question is, what does the recession playbook at Brunswick? And how quickly can you pivot to that to kind of protect the floor and earnings power, whatever you think that might be?

Yes, Craig, I went through the assumptions really that drive us to a kind of a flattish retail assumption next year. I think I'd stand by those at the moment. The call we gave earlier this year about modestly down. Obviously, the market a bit to vary quite a lot, but it kind of came back to where we thought it was. That doesn't mean that we're always right. But I think we have a decent feel for this. But I think what you've seen this year is but we have all kinds of levers to pull, and we're very effective at doing it. We began to work on operating expense very quickly this year as market conditions unfolded and pulled out significant operating expense. So as we – and that was obviously progressive during the year. So on a run rate basis was higher as we go into 2024. But we still have some things that are pretty favorable for us. Obviously, as we see the market softer and generally, market softer across recreation and beyond, the customer supply dynamics change. We're able to influence pricing somewhat more. We pivot people from whatever they were doing this year to work more on getting COGS reductions, design cost reductions, negotiate cost reductions, all those kind of things, including working on our operating expense lines as well. So I think we still have plenty of levers to pull and we consistently demonstrated how effective we doing that.

And I would just add Craig, I think you know this, but I'd caution 15% down from this year would be below the level of sales after the GSE. So obviously, everyone is doing their best to forecast the market, but that would seem to be an extremely down scenario given what we've seen in the environment even this year.

I wouldn't – Craig, I wouldn't also neglect what we can do on the go-to-market side. The new Brunswick Finance solution that we're just rolling out, I think, is gives us some unique flexibility to offer customers promotional financing of various kinds, kind of bridge them through this period of higher rates. So this is a multitude of levers that we have to pull on the go-to-market side, on the COGS side and on the expense side that I think we could – we've shown our effectiveness in doing.

And then I guess, lastly, on the capital strategy side. I mean if we needed to Craig, we could take CapEx down to maintenance levels, which is 30%, 35%, which that starts at $100 million to $125 million. I'm not saying we would want to but that's something we could do. Obviously, our cash generation and our ability to convert working capital has been proven to be pretty strong this year, and I would anticipate next year. So in your scenario, we would go into even more cash generation, buckle down mode, and we've proven our ability to do that just because we don't have a whole lot of other fixed obligations to service at this time of our cost of capital, cost of debt being relatively low.

Without belaboring this, Craig. It was great, but it was an interesting question, I think. We will finish this year if we hit our $9 EPS will be 10% on EPS below last year, but we've been about 10% up on 2021. This will be our second best year ever in market conditions that are less than ideal. So I think we will continue to perform.

That’s really helpful. Thanks guys.

Our next question is from Jaime Katz with Morningstar. Please proceed.

Hi, good morning. Could you guys talk a little bit about the impetus for the new retail financing partnership? I know you just mentioned that it was due help consumers through this period of time. But I'm wondering if it also implies that maybe other retail financing partners are getting a little bit more cautious and are maybe changing their tune in lending currently?

No, it doesn't imply that at all. I think we have been in the retail financing, we have a business called Blue Water Finance. So we've been in the retail financing kind of arena for a while. This is really an integrated digital finance solution that is just much easier and quicker for consumers to access. So it's embedded in a website. You can figure a boat, you can immediately get not only the boat cost but also approval for – or at least provisional approval for financing that would move through to the dealer. So and it allows us to have more flexibility with promotional finance offerings, obviously, at the moment in the current environment, we're offering discounts on purchase price and other things, option allowances, those kinds of things. But this is a new lever for us to pull if we see that a consumer is most cautious because of interest rates versus the potential criteria then this gives us another option. So yes, nothing to do with lender availability, everything to do with giving ourselves a better toolkit and giving our consumers a better experience through the process of acquiring boat.

Excellent. And then can you just speak to new boaters in the market and your ability to continue to track them in this sort of environment? Has the mix of purchasers or participants been changing at all in the last six months or so? And sort of what are you expecting going forward?

Actually, I’ll be honest with you. I don’t have an updated kind of data set on new boaters, but we can go find that. I would tell you, though, that Brunswick brands over index towards attracting new boaters. And interestingly, not only in our value brands like Bayliner, even in our premium brands. And I think the reason – part of the reason for that at least is brand recognition. If you own three of the four best known brands in the U.S. and you’re a new boater, it’s kind of we’re an obvious choice. We’re the top of every list of potential boats in whatever category you want to buy a boat. So I think brand strength, new products are always going to mean that new boaters less familiar with the marketplace are going to gravitate to our brands.

And in addition, Freedom, Freedom is such a good gateway for new boaters, new and returning boaters, boaters that have maybe been out for a decade or more, Jaime. And so that we continue to see really steady membership at Freedom, despite what is obviously a bit of a turbulent time in the market in the overall economy. So all of those things really lend itself to continuing to find ways to bring new boaters in.

Great. Thanks for the color.

Our next question is from Joe Altobello with Raymond James. Please proceed.

Thanks. Hey guys. Good morning. I guess, first question for you, Ryan. Obviously you were hesitant to call $9 in EPS floor for next year, understandably, given all the uncertainty. But you said in the past that you felt like $8 is a reasonable recession floor. Is that still your thinking?

Hi, Joe. Yes, we still stand very much behind those $6 and $8 cases. I think those give a really nice background into what – how we perform in a market situation that obviously we’re kind of seeing ourselves in the market is almost down 30%, 35%. So yes, I don’t think there’d be a whole lot of changes to our thinking on the $8 case. I would say again, Engine P&A, some good lights there and back to kind of steady growth, Navico continuing to be improved, a strong capital strategy and then kind of steady boat and propulsion as they work through market dynamics. All of those things were embedded into those plans. And I think we would be very comfortable with those still.

Okay. Helpful. And maybe in terms of dealers and how they’re thinking about ordering and demand for next year. When do you think they’ll get enough information to start impacting orders? Is it Miami? Is it Palm Beach?

It’s a range, Joe, to be honest, it depends what brands and dealers you’re talking about. Obviously, Fort Lauderdale is going on right now for the next few days, which is premium brand – premium kind of saltwater fiberglass focused. But towards the end of the year, early year shows like Toronto, Chicago, Minneapolis, all in January would be important for the aluminum market. Dusseldorf also at the end of January for the European market, which is mainly a fiberglass market, not so much aluminum market. And then in mid-February of course we have Miami, which is the next big show so it’s really progressive this year. We’re going through Genoa, Paris, Can, all those kind of things. It’s a pretty steady stream of late season shows and early season shows at the moment.

Okay, so it should be pretty early in calendar 2024. Let me know.

Yes, depending on the brand. I mean I think Fort Lauderdale will be a good pointer for premium. So first day was very encouraging for us. We’ll see how the rest of the show unfolds. And then as you get into the balance of the year, obviously not much going on in December but really early January you get into quite a lot of aluminum shows, so there’ll be a good indication of what buyers are feeling at that point in time. And then late January to early February we’ll see more fiberglass, particularly on the premium end.

Got it. Thank you.

Our next question is from Scott Stember with ROTH MKM. Please proceed.

Good morning. Thanks for taking my questions guys.

Hey Scott.

On the parts and accessory side can you talk about what retail POS is looking at – looking like? And maybe parse that out RV versus boat?

Yes, I can take that. We still have limited POS information from various retailers. I’d say on the marine side, kind of on the traditional marine side Scott, we’re seeing kind of retail and wholesale matching. We’re seeing dealers take the inventory they need at the end of the year to winterize product and obviously in the southern hemisphere to keep folks on the water. So again, U.S. products was up 10% in the quarter and only a bit of that is price. So a lot of that is really nice strong demand and filling channels ahead of kind of the end of the season in those places where there is an end of the season. For kind of more retailers and that is primarily, we see that in the Navico Group. We believe that their inventories are right size as we enter the holiday. So we’re seeing pretty strong point of sale there certainly on the new products that Navico’s come out with. I mean to really drive retail ahead of the holiday new products is key and we continue to see good performance there. Obviously we said it in the release but the holiday season is a big time for Navico. They’re preparing and getting the right inventory in the dealer and retailer hands and we would anticipate a pretty strong performance.

All right, just last question. One of your competitors in the recreation and leisure space offroad vehicles did mention earlier this week that they’re seeing or at least they’re hearing from the lenders that there is a slight tightening going on with lenders looking more heavily at things like debt to income ratios. Are you seeing that tightening in your markets at all?

You’re talking about retail financing, right?

Yes, yes.

Customer, credit scores and – yes, I think the spreads are higher. So I think getting to the kind of 9%, pretty good FICO score. So I think we probably are seeing a bit of better increase in the spreads. I wouldn’t say it’s particularly noticeable at the moment. We could get some more detail on that. But yes, I think that’s probably true.

And we are just continuing to see an influx of people bringing cash up and down the whole spectrum, including premium. So that is one that we continue to see.

Okay. Got it. All right, that’s all I have. Thank you.

Thank you.

Our next question is from Mike Swartz with Truist Securities. Please proceed.

Hey guys. Good morning. Maybe just following-up on Joe’s question around order books for 2024 – model year 2024. And I know we’re very early in the show season. But maybe is there any sense or any range you can give us of what those maybe early commitments have looked like versus at the same time last year?

Yes. Hi, Mike. They’re strong. We have very solid order banks across all of our brands at this point in time, and I would say very similar across most brands to last year, or at least, if not last year, at least in line with our expectations of what’s appropriate for this year. So we go through looking at percentage of fulfillment and you probably know we go on a trimester basis here. So right now we’re looking at the kind of first trimester orders, but also the point of full year. But I would say that I don’t have the latest numbers, but I think we are aligned pretty well now and have very solid orders from all of our dealers.

Okay. And then with the – the new labor agreement up in Fond du Lac, just a broader question for 2024. I mean I guess how should we think about the cost environment? Is it still going to be fairly inflationary? Or are you seeing any – the cost curve flatten out or maybe even seeing any benefits as we go into 2024?

Yes. I would say that overall, I think the environment is turning much more favorable for us in terms of supplier pricing. Supply is willing to take willing to offer discounts willing to offer lower prices to us, commodities obviously have come more in line with historical norms. I think our labor cost increases will be very novel. So nothing kind of out of the ordinary for next year. So I would say, overall, the cost environment is going to be constructive for us, and we’re putting a lot of resources in that area right now, I would say making sure we’re very actively working with the supply base to get the best cost, evaluating alternative suppliers. So yes, we will work very actively in that area. And I would expect overall for that to be constructive for the year.

Yes. And every division has cost takeout programs and plans target for the year, not just at the OpEx level, but ways to bring COGS [ph] down as well. So back to the earlier question on what strings do you pull in a tough economic time, looking at programs at the gross margin line can be equally as important to just raw cost takeout at OpEx.

Our next question is from Matthew Boss with JPMorgan. Please proceed.

Great. Thanks. Dave, so maybe higher level, could you just elaborate on the consumer and dealer sentiment today maybe relative to three months ago? Or just how – or what evolved exactly in the forecast. And then specifically with the higher interest rate backdrop, are there any changes you’ve seen so far in the promotional landscape? Or just what levers would you or could you pull to entice customers to convert, if needed?

I think – I don’t think it’s really a change in the sentiment really. I think it’s just the part of the season that we’re in right now. Obviously, three months ago, we’re in the height of the selling season. People are spending their time doing a whole bunch of other stuff, selling as much as they possibly can, focusing on getting product out the door. Now they’re pivoting to much consideration of stocking levels to what is mainly the off season. So, I don’t think sentiment has really changed a lot. I think they’re just now going through normal seasonal changes in the way that the focusing. I think you can tell from our field inventory levels that we have been very careful to make sure that we align well with our dealers that everybody feels good about stocking levels going into 2024. So, I would say they’re encouraged by that. I think the – so I don’t think that there is a huge change in sentiment. Also feedback I’m getting – I’m going to add to Fort Lauderdale later this afternoon. I’ll get some direct feedback. But broadly, OEM customers seem to be pretty positive. Obviously, that show is a premium show and that is the most resilient part of the marketplace. So I just – I don’t think that there is a marked change. I think there’s just general caution. Broadly, some earlier questions we’re talking about some of the more downside scenarios for next year. But broadly, things are generally stabilizing on a price basis on an interest rate basis, the environment is somewhat more stable. I think that there is caution some about what might happen next year. But I wouldn’t say there’s a notable change in sentiment either from OEMs or end consumer. Sorry what was the second part of that question? Can you repeat that part of the question?

Any changes in the promotional landscape? Or are there levers that you would pull just given the higher interest rate environment to entice a customer to convert?

Yes. Well, promotions through the kind of back end of the selling season were kind of up at kind of 2019 levels, I would say. To be honest, at the moment, from now through the end of the year, we’ll be less than 10% of the top-line, you’ll see much less than 10%. So the influence of promotions is diminishing, except in the southern markets where – and those are mostly fiberglass premium markets where we haven’t had such a promotional environment. So we might be kind of working to get the last few units that we can, but I would say the promotion at this time of the year is just not super effective and not super meaningful in the northern markets.

Helpful color. Best of luck.

Our next question is from Tristan Thomas-Martin with BMO Capital Markets. Please proceed.

Hi good morning. Two quick ones. One, you mentioned Fort Lauderdale a couple of times. How were some of the other all kind of fall season boat shows. And then with Freedom Boat Club, what’s the state of the fleet there? And then what could a potential kind of refresh upgrade cycle look like? Thanks.

Yes, good question. So really, Fort Lauderdale, Miami is the kind of start of season premium show in the U.S. and Fort Lauderdale is the more than end of season U.S. show, we’ve been really focusing quite a while on European shows recently. We had a really strong showing at cap. Our brands are extremely well received. We’re able to get some large Boston Wheelers and large Sea Rays over to Europe for a change because in the past three years, everything has been sold in the U.S. So it was very encouraging to get those bigger product files over to Europe and they sold very well. The ban was really well received, and I think represents a significant opportunity for us. And Mercury’s market share through all of those shows was – I can’t remember the exact numbers, but we were in the high 50s to 60% [ph] pretty much every show. So all of the constructive factors that we continue to see we’re prevailing through the latest season European shows. And then obviously, we just have one day of Fort Lauderdale behind us, but hoping for the best for the balance of that show.

Thank you. This will conclude our question-and-answer session. I would like to turn the call back over to Dave for some concluding remarks.

Okay. Thank you all for joining us very much and for the great questions. As you saw despite the challenges, we again delivered a very solid quarter. For the rest of the year, our focus is on balancing continuing to deliver those solid earnings and free cash flow with the imperative of making sure that end of year – inventory pipelines are in the right place as we head into 2024. I think the fact that we’re able to do all this still deliver our second best ever year with EPS within 10% of 2022, 10% higher than 2021 is pretty remarkable, but still moving forward all of our strategic priorities. We didn’t really talk much about electrification, like Avatar and Flight, but those continue to be positive growth opportunities for us. And just again, it is nice to see when there’s a lot of uncertainty around Mercury comes through again with 57% share of Waterdale and close to 70% on the water. So that is an incredible trend that just continues forward, and we’re very encouraged by it. All right. Thank you all very much for joining us.