Good morning and welcome to Brunswick Corporation's Third Quarter 2020 Earnings Conference Call. All participants will be in a listen only to the question and answer period. Today's meeting will be recorded. If you have any objections, you may disconnect.

At this time, I would not like to introduce Chris Dekker, Vice President, General Counsel and Corporate Secretary..

Good morning and thank you for joining us with me on the call this morning, hour, 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 Dotcom.

During our presentation, we will be referring to certain non-GAAP financial information Reconciliation's of GAF 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, Chris, and good morning, everyone. Each of our businesses delivered outstanding operating results in the third quarter.

Our ability to capitalize on very robust retail demand, which was enhanced by expanded voting participation and our compelling portfolio industry leading brands drove excellent financial performance and value for our shareholders.

The power of our platform and our investments in operational excellence were on full display as we accelerated production levels to both meet retail demand, which continues to be elevated even as we exit the primary selling season in the US and begin the process of replenishing historically low pipeline inventory levels are extraordinarily strong.

Free cash flow generation provides us with the flexibility to execute our capital strategy, which among other things, encompasses our planned investments and growth initiatives, including new products, advancing our ACS strategy and maximizing the reach of freedom bookclub.

Our propulsion business continues to gain appreciable retail market share, particularly in higher horsepower categories, as a direct result of our product leadership efforts and has yielded many new OEM customers a new dealer relationships.

Throughout the year, our parts and accessories business delivered significant topline and earnings growth has increased both in participation and favorable weather, which extended the voting season in the US, drove strong aftermarket sales, while OEM production ramp ups across the industry also created high demand for our full range of OEM systems and services, our premium brands remain market leaders in their categories, and our value brands offered attractive entry points to new and returning for the voters.

The surge in retail demand resulted in historically low pipelined inventory levels, with only 14 weeks of inventory on hand of 48 % fewer votes in dealer inventory at the end of the third quarter 2020 versus the end of the third quarter 2019.

As a result, most of our brands of all production slots sold through the 2020one model year and Osteria in Boston, where the brands of production slots sold out into the 2020 to Model Year.

Finally, Freedom Bookclub continues to outperform our expectations, as evidenced by its growth to 244 locations and almost thirty six thousand five hundred membership's company wide, with over 3000 new memberships added in the third quarter alone.

Finally, although we continue to operate in an uncertain environment, our enhanced visibility into the outlook for our businesses enables us to provide guidance for the remainder of 2020 as well as 2021, which Ryan and I will speak to in a few minutes.

Those who continue to outperform the industry in attracting new and more diverse sponsors, which is positioning us very strongly for continued growth, similar to our commentary in the second quarter call, more than half of the sales of Brunswick boats in the period from June through August were the first time buyers are returning lapsed voters with the average age of Brunswick boat buyers being the youngest since 2011 and younger than the overall industry, freedom boasts of membership trends towards an even younger demographic, with the average freedom member being three years younger than the average owner of Brunswick Boat.

The Freedom operating model allows younger voters to get on the water frequently, with high quality products prepared and ready to go for a day with family or friends.

Boating participation has also been more diverse throughout 2020 over the last several months, the %age of women buying boats has equaled the highest on record, while the %age of new female voters of female members of freedom is double the %age of women registering to vote.

More recently in August, we saw an uptick in Hispanic and Asian buyers of Brunswick products and an increase in Hispanic membership of freedom.

It is critical to the success of Brunswick and our industry that we continue to drive more diverse voting participation and find ways to engage with nontraditional voters through new products and participation models and advances in our digital capabilities, and that provide some highlights on our segments.

And the overall market of the publishing business continues to outperform the market due to the strength of our industry. Leading product lineup pipeline inventory of mercury outboard engines is significantly lower than in past years, and we continue to successfully run production to refill pipelines and meet exceptionally strong customer demand.

Mercury continues to gain significant retail market share in output engines, especially in higher horsepower categories.

While we have focused higher levels of investment in recent years as a result of our constant product innovation and the ability to quickly ramp production as a result of the capacity increases in 2018 and 19, Motoric continues to successfully execute its strategy to win new OEM customers, a new relationship with sportsmen and an expanded relationship with Beneteau, the largest manufacturer outside the US, were announced in just the last two months.

And there are many more new and enhanced partnerships and process markets. Outstanding products, expanding capacity and excellent operational performance have also led to new dealer wins, with 60 new repower dealers added so far and 2020 resulting in an improved sales mix.

Finally, the additional capacity has allowed us to serve more international customers where our higher horsepower commercial derivatives continue to take market share markets.

Aggressive new product development cadence remains on track with an all new forward facing Westport's drive launched in August and significant additional new product launches coming in the next six months.

For a statement, first quarter results were bolstered by very healthy boat usage as favorable weather continued to fall for many regions of the US distribution business, which saw revenue growth of more than 30 per cent versus 2019, was able to capitalize on increased participation and extended season in both the Marine and RV spaces.

And Champney business also enjoyed a strong quarter supply products. Drug dealers to support increased service needs to be at commented that they are four, six or even eight weeks behind on servicing, which should continue to generate sales into the traditional off season.

The OEM portion of the business also had a strong quarter as boat manufacturers ramped up production to satisfy demand and rebuild pipelines.

The Advanced Systems Group, which includes outpoll products and Atwood businesses, demonstrated significant year over year sales and earnings improvements, leveraging the same aftermarket and OEM trends, including ESTIE business, represented almost 40 % of the company's sales in the quarter and over half of the operating earnings.

With margins continuing to expand, the steady annuity based business strengthens our overall financial profile and provides a robust baseline of earnings from which we can continuously invest in our businesses and return capital to shareholders of both business.

That a fantastic quarter with top line earnings and margin improvements across the lineup with adjusting operating adjusted operating leverage over 35 %.

The operating performance of the business in the presence of strong wholesale demand, but also the challenge of rapidly ramping up production creates confidence that this business will achieve its strategic goals. Pipeline Inventory Levels, a key driver of future wholesale.

Both sales ended the quarter at approximately 14 weeks, the lowest level at the end of the third quarter for the last two decades. Often, Wheeler in Syria has seen very strong retail sales, and dealer inventories are especially low value. Brands have also performed well at retail and will also require significant pipeline replenishment.

We continue to hire additional workers at most facilities to ramp up production, but it is very unlikely that pipelines will be fully rebuilt in 2021. Freedom Ball Club continues to exceed our growth expectations, with memberships increasing sixty one % since we acquired the business last May.

In addition, sales of frozen products into the Franchise Network are exceeding expectations, with over 800 boats either purchased on order since acquisition each week with a mercury engine and equipped with our unique products.

Just recently, Freedom was named to Entrepreneur magazine's first top grossing franchises list, which recognizes the hundred and fifty companies with the greatest positive franchise unit growth in North America over a three year period.

Just a few weeks ago, the NHL Stanley Cup champions Tampa Bay Lightning held their championship parade on the water in Tampa, using 20 boats from three to Bookclub, making national headlines for one of the most unique championship celebrations in history. Finally, our investments are accelerating and improving.

Our digital assets and capabilities continue to bear fruit, as many important industry shows are scaled down or canceled due to corporate 19.

This morning's announcement regarding the cancelation of the Miami International Boat Show, along with many other early season 2021 shows was anticipated and does not influence our wholesale and retail demand projections.

Our digital and e-commerce technology is enabling us to reach and engage with a wider audience of potential new voters, dealers and other customers. In addition to launching new products online, a recent vertical trade show held by our land and sea distribution business generated sixteen % higher sales than the equivalent physical show last year.

Next, I'd like to review the sales performance of our business by region on a constant currency basis third quarter sales increase versus twenty nineteen in all regions and across most businesses and the US total revenues with twenty seven % higher while international sales were up twenty four %.

Asia continues to experience robust demand for high horsepower outboards, mainly for commercial purposes, and that EPS sales of the regions of the world, including Europe and Canada, reverse the challenges of the previous quarter and reported strong year over year.

Growth in international sales are up 5% yesterday, led by gains in the propulsion business. This will provide some color on the performance of the US marine retail market, the first three quarters represent approximately 90% of total sales volume for the year.

And it's becoming a very strong year, as most of you know, although categories reported retail gains in the third quarter of positive growth for the year. The main powerboats segments were up 39% in the third quarter and are up over eight % year to date.

With Brunswick's retail performance exceeding the market output, engine unit registrations were up 34% in the quarter, with mercury significantly outperforming the market, as they have done for all of 2020.

Mercuric a retail share in the third quarter and just about every horsepower note with outsized increases in large award engines over 200 horsepower closing out the year, we anticipate fourth quarter retail to continue in growth mode as lead generation finance applications, dealer sentiment and other leading indicators are all very positive.

As another reminder that the pipelines remain lean and currents of blue water retail finance business is seeing more than 75 % of applications being related to current Moglia, both approximately double the percentage at the same time last year when pipeline inventory was less current.

All these factors give us confidence in the retail market as we move into 2021. I'll now turn the call over to Ryan for additional comments and our financial performance. Thanks, Dave, and good morning, everyone..

What about the retail demand? Together with late stalled late season, both usage had a material impact on our financial results in the quarter, making for significantly better year over year comparisons.

Net sales in the quarter were up 26%, while operating earnings on an adjusted basis increased by 49% adjusted operating margins, or sixteen point 5%, up 260 basis points versus third quarter twenty nineteen. And we finished the quarter with an adjusted EPS yet of a dollar eighty, up 64% from prior year.

We generated three hundred and ninety six million dollars of free cash flow in the quarter. This outstanding outcome is driven by strong earnings and favorable changes in working capital, resulting from reductions in inventory and increases in accounts payable from increased production, as well as a seasonal reduction in accounts receivable.

On a year to date basis, net sales are flat versus twenty nineteen and adjusted operating earnings were down two %, adjusted operating margins of 30.6%, which are just 20 basis points lower than the same period in twenty eighteen is a very good result, considering the challenges faced by the businesses in the first half of the year with having to shut down, then ramp up production as a result of the pandemic.

I will now discuss the third quarter performance on a segment level, starting with the propulsion segment, revenue increased 33% as each product category experienced strong demand, especially in higher horsepower outboard engine categories and related controls and systems.

All customer channels showed growth in the quarter as OEM customers continued to ramp up production and increase capacity, enabled elevated sales to the dealer and international channels.

Operating margins and operating earnings were up significantly in the quarter as a result of increased sales and favorable changes in sales mix, partially offset by the unfavorable impact of higher variable compensation costs in our parts and accessories.

Segment revenues increased 23% and operating earnings were up twenty nine % versus third quarter twenty nineteen due to strong sales growth across all product categories.

Adjusted operating margins of 23.4% were 100 basis points better than the prior year quarter with year to date margins now 20 basis points better than year to date 29%, showing the consistent, sustainable earnings power of this business.

Revenues in the boat segment were higher by 18%, resulting from significantly higher wholesale sales to dealers, both to meet increased customer demand at the retail level, as well as to begin refilling pipeline inventories. All of our boat brands steadily ramped up production in the third quarter to meet the strong demand.

Boston Whaler and Zeray continue to outperform their category. Line remains the leader in premium aluminum fish boats and our value brands also showed healthy retail demand.

Increased production and sales resulted in healthy operating leverage of thirty five % during the third quarter, driving operating margins to nine point two percent, a 470 basis point increase compared to the third quarter of twenty nineteen.

All product categories contributed to margin growth with Boston Whaler Lond and the VentureBeat Group, which includes Bayliner and Hayday all exceeding 10% margins for the quarter. As we've been discussing as a result of the surge in retail demand, the dealer pipeline ended the quarter at historically low levels.

Our lowest pipeline inventory levels in over 20 years are our brand ended the third quarter with 14 weeks of both on hand measured on a trailing 12 month basis with units in the field lower by 48%. Our pipeline projections for yearend assume that dealer inventories will increase through the fourth quarter to approximately twenty two weeks on hand.

But that will still be approximately 13 weeks behind typical year end levels to help put this into perspective. We are currently estimating that we will wholesale in 2020 between twenty eight and twenty nine thousand votes while retailing between 36 and thirty seven thousand votes.

Even if we assume a flat retail environment next year, we will need to manufacture and wholesale seven to nine thousand more votes in 2021 just to satisfy retail demand without building dealer pipeline inventories.

We believe our current manufacturing footprint will support this increase and we continue to work with our brands to unlock even additional capacity, the resulting pipeline inventory levels and still be below desired levels by the end of 2021. But this would position us for strong wholesale sales again during 2022.

While we remain very cognizant of macroeconomic headwinds and other uncertainties, our continued strong performance and a robust marine retail environment have created improved visibility into our substantial growth opportunities for the remainder of 2020 and 2021.

Despite the potential impact of the pandemic on our global labor availability and supply chain, elevated production levels over time will be required to rebuild and engine pipelines. And together with significant upcoming product, new product offerings should drive wholesale growth into next year and below and beyond.

As a result, we are providing the following guidance for the remainder of 2020. We anticipate that U.S. marine industry retail unit demand will be up high. Single digit percent for the year was slightly stronger demand in the U.S. than in international regions.

We expect fourth quarter revenue to increase low to mid teens percent over Q4 2019, with adjusted operating leverage in the high teens percent. Lastly, we believe these efforts will drive full year adjusted diluted EPS of approximately four dollars and $0.75, with three flat free cash flow generation in excess of 600 million dollars.

These 2020 expectations and the initial thoughts on 2021 that they will discuss shortly, assuming no additional major pandemic related business continuity issues.

In addition, as we have cautioned in the past quarters, it cannot be overstated that the level of recovery of the global economy continued stable channel operations, the ability to moderate labor and input costs, and the absence of significant additional disruption to our global operations and supply chain will all be important factors in determining whether we ultimately perform in line with our targets.

Our current liquidity position is very strong. Our liquidity planning is influenced by several factors, including our cash position, our ability to generate free cash flow and retain full access to our revolving credit facility, as well as our plans around debt repayment, share repurchases and dividends.

We anticipate generating free cash flow for the year in excess of $600 million, and we plan to have total liquidity of more than nine hundred and seventy million dollars by year end. We ended Q3 with cash balances totaling $660 million versus $332 million a year end.

This increase included free cash flow generation of five hundred and twenty million in the first nine months of 2020 or approximately $441 million, more than the same period in 2019, principally related to favorable changes in working capital driven mainly by reductions in inventory.

The significant free cash flow generation in the third quarter allow the company to repay the remaining one hundred eighty five dollars million of borrowings under its revolving credit facility and further reduce our long term debt obligations by thirty nine billion dollars as planned.

I will conclude with an update on certain items that will impact our piano and cash flow for the remainder of the year. Aside from the updated anticipated free cash flow just discussed most of these estimates, he's changed only slightly since the July call.

The one exception remains working capital, where we now estimate a reduction in excess of one hundred seventy five dollars million for the year. Given the demand and production dynamics we have discussed, inventory levels are down significantly through the first nine months of the year.

And although we do anticipate building inventory in the fourth quarter in our propulsion and Pinay segments, we had dissipating the year with reduced working capital. We anticipate between 115 and 120 million dollars in depreciation and amortization.

Our effective tax rate is estimated to be between 21% to 22 % for the year when the cash tax rate anticipated to be in the low double digit %. Our average shares outstanding figure remained at approximately 80 million shares.

Also, as a result of the strong cash flow generation, we've made some significant changes to our capital strategy assumptions reflecting actions we plan to take in the fourth quarter.

We are now anticipating that we will use an additional 60 million dollars of our considerable free cash flow to continue paying down our 2023 term loan, resulting in total debt retirement of one hundred and sixty dollars million for the year.

This incremental repayment would lower our debt EBITDA our leverage below one and a half times on a gross basis by the end of the year.

In September, we also announced that we are restarting our systematic share repurchase program with a goal of repurchasing $100 million of shares in 2020, which is consistent with our target to start the year we completed forty five million dollars of repurchases in the third quarter, leaving us with $21 billion of planned repurchases in the fourth quarter.

Finally, as discussed last week, we have increased our quarterly dividend by $12.05 to $0.27 per share, which represents the eighth straight year of dividend increases. That decision is enabled by our strong financial position and consistent cash generation, which has benefited by the growth of our less cyclical play and free to both club businesses.

And it's consistent with our policy objectives of sustaining our dividend throughout the economic cycle. I will now turn the call back over to Dave to continue our outlook comments..

Thanks, Ryan. 2020 has presented many challenges. Our businesses are executing extremely well against our operating and strategic priorities.

In the propulsion segment, we continue to leverage the strongest product line up in the industry to gain market share in the parts of the market where we've been historically underrepresented of further growth into Salt-Water.

Repower international commercial markets is being enabled by the manufacturing capacity added in 2018 and 2019 and will be bolstered by exciting new product launches in the coming months. Finally, with lower engine inventory levels across the globe, we continue to increase production in an efficient manner to refill the pipeline and the segment.

We anticipate steady demand, aftermarket parts and accessories as both is complete and the season servicing in northern markets. We also expect demand to remain high for our OEM product lines and integration services as both builders continue to ramp up production to replenish pipelines ahead of the 2021 retail season.

In our Boat segment, we will continue to focus on launching new products across the portfolio, including some new products designed for younger voters, ramping up production to meet demand and result pipelines and making progress.

With our stated plan to further improve operating margins, Bookclub continues to expand and execute against this strategic growth objectives. We've added over 30 locations thus far and 2020 with franchisee demand for products peaking well ahead of anticipated levels.

We're making rapid progress with our enterprise wide initiatives in digital marketing, ecommerce, consumer insights and data analytics, while also driving our ACS strategy forward.

One recent example of our ACS investments is our Freundlich partnership with the marine autonomy company Sea Machines, in which we announced yesterday an additional investment aimed at advancing autonomous piloting for marine vessels progress's. These initiatives will be accelerated by new leaders with very contemporary skill sets.

Joining our senior leadership team in the last few weeks, we welcomed On Your Denarii it was deep experience in advanced mobility systems as the new president of our Brunswick.

Well, Mike Adams, who's been leading many of our digital initiatives, has been promoted to the CIO role and Brendel has been named vice president investor relations earlier this week. We also announced that you feel same is joining the Brunswick board.

Rugy is the former president and CEO of Nintendo North America and has deep knowledge of digital technology and developing compelling consumer concepts and experiences. Before we close, I want to provide a brief update on our initial view of 2021.

As you know, the progression of the global pandemic remains very dynamic, and the potential impact to our dealers, OEM partners, suppliers and the macroeconomy is difficult to predict. However, we do have improved insight into next year due to increased clarity on wholesale.

Both demand the impact of Murphy's continued propulsion strength, the consistent growth of the business, and the availability of cash to fund our planned capital strategy actions and growth initiatives. We will provide a clearer view on our forecasts for the 2021 marine market during our Q4 earnings call in early 2021.

However, in a reference scenario, what U.S.

marine industry unit demand is flat to up low single digit % for the year, we would anticipate consolidated revenue between four point seventy four point nine billion, adjusted operating leverage of high teens to low 20% and adjusted diluted EPS in 2021 of 5.75% to 6.25%, with growth coming in several areas.

First, we forecast strong gains in our propulsion business as we continue to take market share resulting from an enhanced, stable industry leading products.

Next, we believe that we will capture significant growth in wholesale both sales, given the historically low pipelines and strong retail demand, which is backed not only by strong dealer orders ahead of the 2021 retail season, but also from an increased dollar of dealer orders that are already retail sales.

However, note these projections do not assume that we will fully rebuild the pipeline in 2021. We also anticipate a unique business to continue its steady expansion as both sides spend time on the water. Finally, our capital strategy should generate favorability as a result of that reduction and systematic share repurchases.

I want to reiterate our continued confidence in our ability to successfully execute a 2020 strategic plan of also ensuring that we continue to prioritize protecting the health and welfare of our employees in the COVID-19 environment.

Given our strong financial position, which enables continued investment in new products and technology development industry, leading products which are generating continued market share gains, current or pipeline levels, the performance of real bookclub and our focus on operational efficiency and cost containment.

We expect to meet the 2020 financial objectives shared in Miami in February. This morning, we announced that our board of directors has elected not Cooper as its new non-executive board chair, effective November 1. That's the is the first female board chair in Brunswick's history.

Natalie succeeds Money Fernandez, who has announced his intention to retire after more than 20 years of service to the company. I want to personally thank money for his decades of support and leadership to Brunswick, and I look forward to continuing to work with NetSuite as we successfully execute our Marine focused strategy.

Finally, operations teams are keenly focused on applying and enhancing our covid-19 health and safety protocols while continuing to ramp up global production to meet unprecedented market demand. I want to once again thank our 13000 global employees for their commitment, hard work and vigilance during this challenging time.

I also want to thank our loyal long term customers and welcome the New Brunswick voters of freedom members who've been able to enjoy safe outdoor fun with their family and friends in 2020. I will now open the line for questions..

Thank you. Ladies and gentlemen. [Operator instructions] And the first question comes from the line of James Hardiman, Wedbush Securities. Hey, good morning, guys..

So I'm going to ask sort of a weird question, but bear with me here. I mean, I've been covering you guys for the better part of well, I don't know myself, but a big part of I think analyzing the business and certainly managing the business has been just understanding the cycle right.

And we find ourselves in a in a situation where we're in the midst of a recession and yet the industry is going to be up high single digits.

So my question is, as we look to 2021, should we be thinking about that is as the first year of an economic recovery or the eleventh year? I think most industry observers had sort of resigned to the fact that maybe we'd get to, you know, 200000 units at the peak of a cycle or maybe a little bit better. And that was about it.

I'm curious how you think about the long term potential from an industry perspective and whether or not anything has changed and how you're sort of cycle thought inform your capital strategy, right. Sitting on, $600 million in cash, $600 million free cash flow.

Obviously, the way you think about the next few years is going to inform, you know, what you invest in. So sort of a big picture question there, but any thoughts would be welcome..

Thanks very much. To speak big your question, but thank you for thank you for asking it. I think, obviously this year is has some unusual trends in it, but we intend to fully capitalize on those trends in a way that I think will influence our business for many years to come.

It is clear that we are overinvesting of new voters and diverse voters versus the industry, and we will be working hard to retain those new voters and indeed in next year and the year beyond. Make sure that additional people join, I believe, as a potential network effect here, which will be expanded.

If you think about this year, we have all these new voters and returning lapsed voters. But that really that decision time was very short. They had to decide between essentially April when we were in the depths of the first stage of the pandemic, whether they were going to suddenly buy a boat.

I think given the amount of publicity around boating and the safety and utility and enjoyment. I believe that there will be many more people making longer term decisions that will support us for a number of years to come.

In terms of the way we kind of think about the business right now, I think we've made it clear today that we're in the middle of a multi-year effect from a wholesale perspective, as Ryan mentioned earlier, even producing at historically high levels. We will not make significant progress in increasing the pipeline in 2021.

So we believe that the wholesale drivers here are multi-year wholesale drivers. I would tell you that when we talked about our reference strategy here, it is a reference strategy. I would say it's a cautious strategy. Every leading indicator that we have points to much more robust retail demand, but we don't know exactly what we don't know right now.

And so we thought we would offer the strategy that presents the business in a way, a kind of a kind of neutral market way.

How would how would we do in a neutral market the way that we generated cash this year certainly puts us in a I think, a strong position to accelerate some of our growth investments, whether those are organic or potentially inorganic, and positioned ourselves extremely well for a range of scenarios, probably more quickly than we would have anticipated just a few months ago or even a year ago.

So I think we find new energy in the business right now around the retail demand and wholesale demand. And our objectives are to capitalize on that, not just in the short term, but also in the long term..

Thank you. Your next question comes from the line of Scott Stember would see. OK..

My main course is just on the credit worthiness of the people that you have come here. And obviously we're in the early stages of a potentially multi-year cycle here of a lot, much younger consumers coming into this market.

Could you give us any additional color on you know what the I know they're younger, as you mentioned before, about the income level and the credit worthiness and give us some comfort that we won't have some issues potentially down the road..

Yes. God, this is where we've actually been tracking this, obviously, through our blew out of retail finance organization. And we are not seeing any major changes or shifts in the credit worthiness of the potential buyers. So, you know, interest rates remain low, financing remains very available. And to today, we have not seen any market shift..

Thank you. Next question comes from the line of Craig Kennison with Baird..

Hey, good morning. Thanks for taking my question. I hope it's different than what I just heard, but wanted to really understand mercury in the market share trends better. I know you've had the Evinrude when you've also had OEM wins with sportsmen and Bennetto.

I guess I'm wondering if you can help us understand or quantify really the share gains that you've seen and then help us understand what's driving. And it feels like it's been a huge year in terms of market share wins. And I'm guessing maybe some of your OEM partners are getting a peek at what your future innovation looks like.

But just want to understand those trends better..

Thank you. Great to hear from you of the market share gains significant and we, as we said earlier in the year, that we are already training ahead about twenty, twenty two objectives, which were part of our Miami presentation. So clearly, Mercury is accelerating even faster than we had anticipated.

I think we clearly have the best product lineup in the marketplace. And I'm very excited about what is frankly just around the corner as well, which I think will expand that leadership.

But I would say, though, that Mercury is a very, very reliable partner and it's important for our customers not just to have the best product, but be able to get it reliably. And so the investments that we've made over recent years and also the level of partnership that we demonstrate I think is superior to our competition.

These winds don't just come overnight. They come after long periods of investment in terms of relationship building, as well as displaying the benefits of our new technology. I would say that you mentioned some of the bigger wins, but just over the past year, we have 44 zero new OEM customers.

So you can tell how fast this is happening and we are well positioned to capitalize on that. Trend is very significant and it has a lot of momentum in it..

And then, Craig, I would also add to that that we still have areas including repower international markets and Salt-Water, where we still are under indexed to our US share. So there is still runway to go, ample runway to go on the on the share gain. So it's not a we're not close to the finish line there. There's still work to be done.

And as they said, with the best products in the industry and more to come, we're excited to go out and tackle that..

Thanks. And since James open the door on these big picture questions, I'll slip one in here. Your new president of the Bolt group has an automotive background, including work in this AIDS field. And I know you just made that investment in Syria and see machine robotics.

To what extent are we on the cusp of some significant revolution in kind of the operations of a boat? Is that something that's overstating it?.

I would say that there is significant progress in a lot of the same areas of technology that you will see in other verticals. We do have a difficult and different use case in a boat, but nevertheless, these things are going to be more material to our business in the next several years.

And so we need to position ourselves with the right talent to be able to fully capitalize on that and differentiate ourselves. Our new president on January is indeed most recently from that field of electronics and but other systems.

However, she has a long history in operational excellence, strategy and product development, in addition, which I think will equip her to run that business in a very, very contemporary way. In addition to advancing the technology suite in a way that I think differentiate will differentiate our product lines..

Thank you. Next question comes from the line of Eric Wold with B. Riley Securities..

A couple of questions around M&A as you think about the, you know, the increased comfort you now have with the 2020 to financial targets back in February.

Are you are you seeing an easier path getting there without acquisitions, or is the assumed M&A contribution the same as it was back when you first gave those targets? And then you think about the acquisition opportunities out there, you know, have you seen any change with the recent surge around, you know, the number of opportunities, expectations becoming elevated? And does this change your view of potentially, you know, increasing further in the boat category itself, or is that something you're still somewhat against?.

We still have a very active M&A funnel. So we are proceeding as we, as we've previously indicated, looking at organic growth opportunities. And we continue to focus the majority of our efforts exactly as we indicated, which is then kind of play annuity orientated businesses, service businesses like freedom, et cetera.

So I'll kind of bull's eye, if you like, has not really changed for 2021 of the purposes of simplicity. We did not include any inorganic growth opportunities, but we remain very actively looking in that area and we do indeed see a number of interesting opportunities..

Thank you. Next question comes from the line of Joe Altobello with Raymond James..

So I guess the first question, this is probably a hard number to tease out, but within that high single digit U.S. retail industry growth you guys are looking for this year.

How much of that do you think is coming from the unusually high number of new and last voters this year versus what we would see in a normal year? I'm just trying to quantify maybe what the COVID tailwind, the lack of a better term is for this year..

Yes, it's a good question. So I think I think in the middle of the year, we had we definitely had a significant contribution from new and lapsed voters.

I would say that we do believe, though, that because of somewhat constrained inventory, they probably displaced more traditional voters who would have in other circumstances, probably upgraded their vote this year.

So given the inventory constraints, it is a little difficult to kind of understand exactly what the dynamics of that effect would look like in eight years.

I think it is possible next year that we'll be seeing similar levels of influx of new voters and people who wanted to wanted to upgrade this year but didn't have an opportunity to of reentering the market as well. So there's no great answer to your question.

But in a supply constrained environment, which we kind of around right now, it's difficult to know that..

I understand. And I guess, secondly, Virion, you did some really good numbers. It's a really good color on units and pipeline we built for two thousand twenty one. I'm curious what you're seeing on the home front. I mean, obviously, Weller and Seawright are selling very nicely and tend to be higher priced.

So, yes, I know what next year as well on the book..

Yeah. Joe, as we do continue to climb in, even in light of a little bit more strength on our value product this year, I think people putting more content on their product up and down the line of whether it's value or premium is really driving that.

So, yes, I would tell you that probably some tailwinds there also, combined with the fact that some of our more premium brands, such as whalers, specifically have new product line up, a new product that is ramping now and probably we'll see a little bit more retail next year as opposed to what they did this year.

So I would say yes on your ASP question, maybe just a bit..

I just don't this helps. But we're only a day into the Fort Lauderdale boat show, but we're already seeing sales from the first day of whaler's ahead of last year, even with the extended delivery times that we would now be closing.

So it is clear that there are people who may be delayed that purchases this year and are now thinking, I better get in the queue, otherwise I'm not going to get anything right..

Okay. Thank you. Thanks, Joe..

Thank you. Your next question comes from the line of Gerrick Johnson with BMO Capital Markets..

I think one of the things you see, David, when you address 2021 guidance you mentioned have more clarity and clarity where all the drivers you didn't mention clarity on supply cost like that. And if you could talk about that part of the equation, that is your guidance for twenty, twenty one, anticipate new capacity.

And what level of capacity utilization will you be at to achieve or. Twenty, twenty, twenty, twenty one numbers..

Thank you. I think maybe answer in the last night does not anticipate any new capacity. It does not anticipate any bricks and mortar. There may be some local, you know, the smaller things that we need to do. But given the demand, we are certainly looking at not really a lot of bricks and mortar, but other ways to potentially increase capacity.

And we're actively studying that right now on the cost side. We're certainly seeing a little more pressure from suppliers who are constrained at the moment, probably by their own internal capacity and may be experiencing kind of due to pressures as well at the moment.

I would say on the cost side from on the supply chain side, it doesn't look like anything that we couldn't contain or very largely contain. Our ability to ramp up is it's been very good. And I think we've been hiring a lot of people. We hired 900 people across the operation in Q3, 900 production workers in Q3. We're still hiring pretty successfully.

But certainly as we go through the dynamics of corporate in the different states, you know, we see different levels of absenteeism that we have to compensate for. So the 2021 forecast is really a no new major capacity actions, assuming that we can continue at reasonable levels of operational ramp up.

And in that scenario, as Ryan mentioned, we don't really put a big dent in the in the in oh, we've been unable to recover a lot of pipeline. Obviously, that is not that is less than we really would like to do ideally. So we are certainly studying ways in which we could ramp up faster, but it would not material materially impact our footprint..

Okay and then right now your inventory is down twenty, twenty seven % year over year. It looks like you'll have to follow a lot of materials in the next couple of months to hit that sales guidance.

So given the state of supply chains, how confident are you in being able to achieve revenue growth of, what, 13 to 15 %, I guess?.

Well, so far, we're very actively managing and monitoring our supply chain. We I would say that although we were experiencing issues that we need to manage on a daily basis, nothing is really slowing us down. So, you know, it's possible that that will happen. But that is not the current situation.

I think we're all managing our way through the through the corporate environment as best we can, both us and our suppliers. And so far, we've managed to do that. So essentially, we well, we have short term shortages. We manage that. I can't see exactly what might happen in the next year.

But obviously, if there's a major disruption that's going to impact those. Right now, we seem to be managing Okay and I believe that we can ramp up as we need to deliver the 2020 forecast..

Thank you. And our next question comes from the line of Mike Swartz with Truist..

Good morning, guys. Mike 2020 guidance range you can help us with this. So the operating leverage for fourth quarter, third quarter. So I don't see a lot of change in terms of what I'm talking about. Strong demand they sent for us.

So I guess why should we expect that step down between the third quarter in the fourth quarter?.

Yeah, thanks, Mike. And then this is something we obviously anticipated coming into the call. The third quarter is quite strong, really at the gross margin line.

We had very favorable mix in propulsion and really throughout some of the Pinay categories as well, and also some lower retail discount in the bulk group, as you would imagine, given the state of play in the retail market.

Also, OpEx was down in the quarter, obviously up as a percentage of stronger sales and frankly, just operating efficiency across the board, benefiting from the cost takeout measures that we did in 2019 and earlier this year.

And then when you look to the fourth quarter, they're still going to be some benefits on the gross margin line, probably a bit muted, a little bit more muted due to the smaller sales increase that we're anticipating makes that up. It probably would continue a little bit, but not quite to the same extent.

I remember we've got some seasonality in there, obviously with lower sales projected and propulsion and pinay just due to the usual course of play and then on OpEx in the fourth quarter and a couple of things. There's a little bit more R&D expense coming out of mercury, which I think most people will say that's a good thing.

That means good things on the horizon and a little bit more variable comp that is associated with our better performance. So, you know, it's not a it's not a big number. Obviously, with the fourth quarter, leverage is still within our usual cadence between high teens and low 20s goal above.

You know, a couple of things swaying a little bit in the fourth..

The second question, just more philosophical level, I guess, given the amount of visibility you have given the liquidity you have, how does it change when you think about financial leverage in the business over the next several years?.

Yeah, they might you know, we obviously are going to end up in a position at the end of the year, which is where we strive to be one and a half times. I assume you mean our financial leverage from a debt capacity standpoint? Yeah, we're going to we're going to be in a good place, obviously, by the end of the year.

And as we continue to pay down our term loan debt, that number is going to get closer to one time. And all that does is enabled us to ramp up as needed for a large investment, whether it's product or M&A or the like. I think we've shown with the power products deal that we are able to leverage up and will for the right deal.

And, you know, the rating agencies seem to be OK with that, given that we you know, these are good mergers and acquisitions, deals and good assets out there. So we are we are OK leveraging up for the right asset, but, you know, continue to work it down over time.

I think given the nature of what we do in our industry, I think keeping it, you know, two times that lower or really one and a half times lower will still remain. Our will still remain our goal..

The next question comes from the line of Brett Andress with KeyBanc Capital Markets..

Hey, good morning.

I may have missed this, but how much of your boat production flops have a customer name on it? Or is retail sold at this point versus maybe how much is allocated to the dealer restocking?.

Yeah, we really don't give that exact number, but I would tell you, it's you know, it's less than it's less than half, but it's more than usual this time of year..

Okay. I met on five twenty five where you talk about the 21 EPS Bridge, just a question on the smaller Pinay contribution in that slide.

I mean, what are the underlying assumptions there? And, you know, that underwriting boat usage or restocking next year versus the other segments?.

Yeah, this is another one we anticipated. Pretty, pretty straightforward. Just because it comes out a little bit on the chart, then this shouldn't be surprising because this is a more steady grower, more annuity based. You know, it grows a little bit with inflation, plus some market share gains and other things in the OEM business.

I think, you know, we had a very strong we're having a very strong second half in that business. You saw the revenue gains in the in the third quarter. I think if you take our guide for the fourth quarter, that includes some pretty strong growth there as well.

So that's a business that's able to kind of restock a little bit more continuously, whereas engines and boats, it takes a little bit of time to refill, refill the pipeline. I would note.

Obviously, that segment, as they've mentioned, is one where Havanas is where, you know, where one area where we're targeting that description does not include M&A on that page or in the 75 to 76. So there's probably a little bit of, you know, maybe a little bit of conservatism there.

But this is a fantastic business that really elevates our earnings floor in any economy, in any marketplace as shown by its performance in the second quarter this year when, you know, essentially the world, the world's stock for two months..

Thank you. And our next question comes from the line of Shawn Collins with Citigroup..

Great. Hey, David, Ryan and Brant, good afternoon, so to speak, with you so much. My question is on margins and specifically margins, the about segment top line trends are obviously quite healthy. But in addition, your operating margin really came in at what I believe is a record margin of nine point two %.

I know you have done a lot of hard work around cost realignment and restructurings. I wanted to ask you to some margin and a level of profitability that you think is sustainable in the future. Thank you..

Thank you for the question. Yeah, we certainly believe it's sustainable and we certainly plan to grow that even further. I think we obviously in the third quarter and fourth quarter are benefiting from volume, but we're also working through ramping up onboarding people, training people and having some inefficiencies in that process.

So I think our strategic actions in the group are flowing through nicely cost reductions, organizational consolidation, in addition to the strong product line and some of the new products coming through. But we have room to run on those margins, both on the efficiency side and I think on the gross margin side as well.

So we're I think that this is a great a great trend. Very glad to see it. But expect more..

That's great. Thank you, David. Maybe just a quick second question on supply chain. I know you just touched upon it to some extent already, but we certainly hear get a lot of questions on this subject. As Ryan accurately said, the world stopped for two months and then it restarted all at the same time. And that's created some logjam.

Can you just talk about some specific areas where you've seen more challenges and where you're putting a little bit more of your time to obviously successfully navigate any supply chain concerns there? Thanks..

I think that we have the benefit of a, you know, a propulsion supplier that from Mercury that invested tremendous tremendously in capacity and efficiency and continue to invest there. So I think all of Mercury's customers uniformly are benefiting from not only Mercury's great products, but it's a tremendous investment and capacity.

And so that takes that issue off the table that other people might be experiencing. I would say that. As we go through the various ways of COVID, it affects different states and even different countries somewhat differently.

So, for example, Mexico, the northern states and Mexico, where a lot of wiring harnesses and other electrical systems are developed, I've experienced some ups and downs, although right now that area is producing very well. So I would not isolate any specific kind of subsystem as an issue.

I would just say that we are continuing to manage and are working extremely well with our supplier partners and we're very thankful for all the efforts that they're putting in. There is nothing right now that is rises to the kind of area of holding the business back..

I understand that is helpful. Thank you for the time and insight..

Thank you. At this time, we would like to turn the call back to day for some concluding remarks..

Well, thank you all very much for attending today. And thank you all for the wonderful questions. As you've heard, it's been in some ways a challenging year for all of us, including our employees. But our whole team is very, very excited about the energy in the marine market.

We believe we have a unique platform and our investments in products and technology and capacity position as exceptionally well to capitalize on the situation of all of our retail and wholesale. Leading indicators suggest this is a multi-year and very robust prospect.

I'd like to close by personally thanking outgoing chairman Manny Fernandez for his tremendous partnership over the last two years and wish him every success in the future. I know we'll stay closely in touch and by warmly welcoming Nancy Cooper of our new board Chair and Reggie Feltham as a great new board member. Thank you all very much..

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program and you may all disconnect..