Good morning, and welcome to Brunswick Corporation's Second Quarter 2022 Earnings Conference Call. All participants will be in a listen-only mode until the question-and-answer session period. Today's meeting will be recorded. If you have any objections, you may disconnect at this time.

I would now like to introduce Neha Clark, Senior Vice President, Enterprise Finance, Brunswick Corporation..

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 the call our comments will include certain forward-looking statements about future results.

Please keep in mind that our actual results could differ materially from these expectations. For details on the factors to consider, please refer to our recent SEC filings and today's press release. All of these documents are available on our website at brunswick.com.

During our presentation, we will be referring to certain non-GAAP financial information. Reconciliations of GAAP to non-GAAP financial measures are provided in the appendix to this presentation and the reconciliation section 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. In the second quarter, we delivered our first ever quarter with more than $300 million of adjusted operating earnings and together with record revenue and EPS continued our trend of exceptional performance in the challenging macroeconomic landscape.

We maintained our strong focus on cost control and operational efficiencies while continuing to invest in new capacity, new product programs and ACES initiatives necessary to fuel future growth and market share gains.

All our divisions contributed to the strong performance while continuing to actively manage our supply chain and negotiate macro volatility.

Consumer demand for our products remain strong as we work through a period of tougher year-over-year retail comparisons versus a particularly strong first half of 2021 while being impacted by continued low field inventory and some enduring supply chain disruptions.

Global boat field inventory levels increased in the quarter over the same prior year period although they remained 55% lower versus the same time in 2019. This is notable as the 2022 retail season had a slower start in some parts of the US and Canada while gaining momentum in the latter part of the quarter. Our P&A business backlogs remain elevated.

Overall, our production remains on track and the percentage of our boat production that is already retail sold continues to be high, especially for our fiberglass brands with no evidence of wholesale cancellations across the enterprise.

As the economic outlook continues to create overall market and sector dislocation, we executed $140 million of share repurchases in the second quarter bringing our year-to-date share repurchases to $220 million. And we plan to continue an aggressive repurchase schedule in the back half of the year.

Prior to discussing our segment performance for the quarter, let me spend a few minutes updating our view on external economic factors, consumer activity and engagement. First, we're seeing some abatement in supply chain constraints and inflation from recent peaks in a number of areas, resulting in more efficient manufacturing across our footprint.

While our businesses continue to experience elevated inflation, any moderation occurring in the back half of the year will factor into our pricing strategies. From a consumer standpoint, we continue to see limited signs of fuel prices deterring boating.

Even as the world has opened up versus the more pandemic impact in 2021, boating participation remains strong and little changed from robust COVID levels. Specific to the US market, population migration towards warmer regions since 2020, approximately towards has increased with six of the 11 largest boating markets reporting net household growth.

Web search interest for boats and boat club related purchase and activity has trended up coming out of Q2, and most recently, searches for boat club are above prior year. Lastly, our internal consumer insights reflect healthy traffic and boat purchase consideration similar to prior year.

As I turn to the performance highlights of our segments during the second quarter, let me note each of our segments delivered sequential quarterly top line improvement. Our Propulsion business continues to deliver outstanding results with 13% top line growth versus second quarter 2021 enabled by increased production and customer demand.

Mercury Marine continues to expand outboard propulsion and retail market share around the globe, gaining 140 basis points over the past 24 months, including 630 basis points in greater than 200-horsepower outboard engines in the US.

As the additional outboard engine capacity at the Fond du Lac, Wisconsin facility comes online towards the end of 2022 and supply constraints are alleviated, we expect further global market share gains.

Our parts and accessories businesses delivered strong sales growth as benefits from acquisitions completed in 2021, steady engine P&A sales in the US and strong OEM sales from our Advanced Systems Group helped to offset headwinds related to early quarter poor weather in certain northern locations, supply chain constraints in our distribution businesses and retailers returning to more normal stocking patterns.

Segment earnings were flat against an extremely strong second quarter 2021, but are far ahead of second quarter 2019 with boating participation remaining elevated and continuing to drive our aftermarket businesses.

Our boat business posted robust top line growth in the quarter with double-digit operating margins, which increased sequentially for the third consecutive quarter. Each product category delivered strong top line growth with our aluminum fishing and recreational fiberglass brands also significantly expanding operating margins.

Finally, Freedom Book Club continues on n its growth trajectory in the US and Europe and now has more than 360 locations reaching 50,000 membership agreements covering 80,000 members network-wide and a fleet size of nearly 5,000 boats, all while generating exceptionally strong synergy sales across our marine portfolio.

On a same-store basis, Freedom membership growth in the quarter was 30% higher than in the same quarter in 2021. Next, I'd like to review the sales performance of our business by region on a constant currency basis, excluding acquisitions.

In the second quarter, nearly all regions posted substantial sales growth versus second quarter 2021, with Canada and Europe delivering strong sales growth in every business unit. Overall, international sales were up 7% versus the prior year quarter, and US sales grew 14%.

Sales in Asia Pacific were down slightly against extremely strong 2021 comparisons, although nearly doubling since pre-pandemic levels in 2019. A comment on propulsion of market share where we have focused our recent commentary on our continuing share gains in the US over the past five years, especially in high horsepower categories.

The same share gains are happening across the globe. Our data indicates we are taking share in each region with significant runway still to conquest, enabled by the additional capacity coming online by the end of this year.

From an industry view, continued low product inventory remains a constraint on retail sales growth versus strong 2021 comparisons. The main powerboat segment was down 16% versus the first half of 2021, but just slightly down versus 2019.

In addition, preliminary June data reflects a narrowing of the US retail gap versus prior year as trends improved through the quarter. Outboard engine industry data is more favorable as the first half of 2022 was flat to the first half of last year and up 10% versus 2019.

Brunswick's boat retail performance in the second quarter was broadly consistent with the overall market performance with outperformance in recreational fiberglass products and pontoons.

In our aluminum fish boat brands, we have focused on margin maintenance and expansion and have shifted production to higher-margin product lines at the recent expense of some unit share of value aluminum product. As important, Mercury continues to maintain its very strong market share in all these product categories.

Among 75-horsepower and greater outboard engines, Mercury has increased US market share in each of the last five years, gaining almost 600 basis points. I'll now turn the call over to Ryan for additional comments on our financial performance..

Thanks, Dave. Good morning, everyone. Brunswick delivered yet another fantastic quarter with record sales, operating earnings and EPS for any quarter on record. When compared to prior year, second quarter net sales were up 18% with adjusted operating margins of 16.4%.

Operating earnings on an as-adjusted basis increased by 13%, and adjusted EPS of $2.82 increased by 12%. Sales in each segment benefited from price actions taken in the last 12 months, partially offset by unfavorable changes in foreign currency exchange rates and supply chain inefficiencies.

While each segment's operating earnings were also impacted by continued material, labor and freight inflationary pressures and spending on growth-related initiatives. Note that changes in foreign currency exchange rates were a mid-double-digit million dollar earnings headwind in the quarter, more than double the anticipated impact.

On a year-to-date basis, Brunswick has also delivered record results, including over $3.5 billion of net sales, $568 million of operating earnings and $5.35 of diluted EPS, which is higher than any previous full year in Brunswick's history aside from last year.

You'll note that we have shown comparisons to 2019 on these two slides to highlight the strong growth CAGRs over the last three years and the record performance of the business versus the second quarter of last year, which was the previous best quarter in company history. Turning to our segments.

Our Propulsion business delivered yet another quarter of outstanding results with record top line, earnings and operating margins. Revenue increased 13% versus the second quarter of 2021 as continued strong global demand for all product categories resulted in increased sales volume, which continues to be enabled by increased production levels.

Mercury also enacted certain price increases in May, primarily targeting 175-horsepower and above outboard categories. Operating margins were up 50 basis points and operating earnings up 16%, each enabled by increased sales and lower operating expenses, partially offset by investments in capacity and product development.

As a reminder, the previously announced capacity expansion at the Fond du Lac, Wisconsin facility, which will add significant capacity for high horsepower outboard engine lineup remains on schedule for completion in the fourth quarter of this year.

This expansion, which will add more than 50% capacity and 175-horsepower and higher categories, will be critical in driving future top line and earnings growth together with market share gains. Our parts and accessories businesses saw a 19% increase in sales due in large part to the 2021 acquisitions of Navico, RELiON and SemahTronix.

Excluding the impact from acquisitions, organic P&A revenues were down 4% against a very tough 2021 comparison, but were up 29% versus the second quarter of 2019.

US engine P& A and core ASG sales were up quarter-over-quarter, while sales in our lower-margin distribution businesses were negatively impacted by the third-party product availability and aftermarket product businesses outside the US.

Supply chain constraints were particularly acute in international regions with US sales also impacted by a slower start to the boating season in northern markets due to unfavorable weather conditions.

Operating earnings were flat against Q2 of 2021, given all the factors previously mentioned, with benefits from acquisitions being offset by outsized material and freight inflation. However, earnings without any benefit from acquisitions were still up approximately 20% versus the second quarter of 2019.

Our Boat segment had a fantastic quarter, delivering strong top line and earnings together with double-digit operating margins despite continued supply chain disruption and cost inflation. The Boat segment reported a 27% increase in net sales due to increased sales volumes to dealers.

Segment operating earnings and margin growth were enabled by the increased sales volumes, together with operational efficiencies and positive mix, partially offset by inefficiencies resulting from supply chain disruptions, inflation pressures, and the production ramp-up of the new Boston Whaler Flagler facility, which will be substantially complete by the end of the third quarter.

Freedom Boat Club, which is included in business acceleration, contributed approximately 6% of the Boat segment's revenue during the quarter, increased from first quarter 2022 as Freedom benefited by acquisitions of both third parties and franchises. Turning to pipelines.

Our production continued to enable more wholesale boats to be sold in the second quarter of 2022 than we did in the second quarter of 2021. However, supply chain inefficiencies continue to result in delayed components and ultimately the deferral of shipping certain nearly completed boats to subsequent quarters.

As of the end of the second quarter, there were approximately 10,000 units in dealer pipeline inventories around the world, still down 55% from the halfway point in 2019.

This translates to just over 16 weeks of inventory on hand measured on a trailing 12-month basis, which is significantly lower than where inventories typically stand at this point of the year. The inventory position in the US is even lower with just over 5,000 units available or 12 weeks on hand.

Inventory levels also differ by product category with fiberglass products, including Boston Whaler and Sea Ray remaining at significantly low pipeline levels due to continued high percentage of retail sold products coming out of our manufacturing facilities.

We anticipate end-of-the-year pipelines to remain thousands of units and many weeks on hand below historical averages. Moving to our outlook for the remainder of the year.

Our continued operating outperformance puts us in a position to raise the bottom end of our full year EPS guidance, even after absorbing the approximately $0.18 of additional anticipated unfavorable foreign currency exchange rate impact in the second half of the year.

In addition, our accelerated and additive share repurchase strategy, which I'll discuss more on the following slide, continues to provide incremental benefits for the year. Finally, our focus on production output and controlling operating expenses is anticipated to help minimize the impact of continued challenging inflationary conditions.

The result is a narrowed full year revenue guidance of $6.9 billion to $7.1 billion and adjusted diluted EPS of between $10 and $10.30. I'll finish my comments this morning by highlighting certain P&L, cash flow and capital strategy assumptions that have changed versus our prior guidance.

As mentioned on the previous slide, we now anticipate a $35 million to $40 million full year earnings headwind due to changes in foreign exchange rates, primarily related to the strong US dollar.

In addition, our anticipated earnings impact due to tariffs has improved by $10 million but still resulted in an estimated $50 million headwind, primarily due to certain components used in outboard engine manufacturing, exceeding 75 horsepower, all of which are manufactured in the United States still being subject to the tariffs.

Finally, we continue to plan on taking advantage of the current market and sector value dislocation by increasing our planned share repurchases for the year. We have repurchased $220 million of shares year-to-date and anticipate repurchasing $400 million of shares for the year, an increase of $100 million from our previous estimate.

This will result in our average diluted shares outstanding for the year to decrease to between 75 million and 75.5 million shares. Our operating performance, together with continued capital strategy execution, will result in an all-time high of $500 million of capital returned to shareholders in 2022 through share repurchases and dividends alone.

I will now turn the call back to Dave for concluding remarks..

Thanks, Ryan. I'm delighted to share some recent highlights from across the company. During Q2, we launched the all-new Sea Ray SLX 260, which is designed by an all-female design team and is the first sport boat to showcase the new Sea Ray design language. The model has been tremendously well received in the marketplace..

Mercury continues to advance market share and deliver new products with the recent announcement of the next generation of 25- and 30-horsepower FourStroke outboards. I'll speak more about both of these in a moment. As I mentioned earlier, Freedom Boat Club has accelerated at a rapid pace.

We now have more than 360 global locations and 80,000 members globally. Integration of our recent franchise territory acquisitions is proceeding well, including the Tampa Bay operation and territory, the largest territory in the Freedom network.

We advanced our sustainability initiatives with the completion of the installation of an array of photovoltaic solar panels in Portugal. Additionally, we recently announced a partnership between Mercury Marine and Alliant Energy to build a 5-megawatt 32-acre solar array in Eastern Fond du Lac County.

Construction on this project is anticipated to start in spring 2023. We're very excited about the launch and tremendous momentum of All Blue Planet, a global Brunswick initiative focused on inspiring our communities, particularly those who are underrepresented on the water to engage with and enjoy the restorative power of being on and around water.

The recent launch events generated more than 2.5 million impressions. And in June, we had four of our fantastic women leaders selected to the Boating Industry magazine 2022 list of Women Making Waves, which celebrates women making outstanding contributions to the recreational marine industry.

I'm going to finish this morning discussing new products, which is always one of my favorite subjects. We have an exceptionally busy second half on new product launches across the enterprise with this slide capturing only a few that I'm able to discuss at this stage.

In addition to the new Sea Ray SLX 260 outboard and sterndrive that I discussed earlier, we'll be launching exciting new models and technologies across all our boat brands with the first new boat model coming from Boston Whaler in early August and many more to follow.

Two weeks ago, Mercury introduced its next generation of 25- and 30-horsepower FourStroke outboards, engineered from the ground up to be lighter, faster and easier to operate and maintain.

These models come standard with digital controls and connectivity, allowing boaters to connect to the most advanced digital gauges in the industry and to our mobile applications, demonstrating how we are again migrating advanced technology initially introduced on larger product to benefit all segments.

Mercury also continues to advance towards the commercial launch of its Avator line of electric outboards. And we'll launch some other very advanced and exciting new product by the end of the year.

Finally, our Advanced Systems Group will soon be announcing new connectivity solutions and advances to its line of advanced energy storage and power distribution solutions for marine, RV and specialty vehicle applications. That's the end of our prepared remarks.

Remember to mark Wednesday, November 16 on your calendars, as we've invited the investment community to our test facility at Lake X, outside Orlando, Florida for a day on the water to experience some of the new products and technologies I've just described. We'll now open the line for questions..

Thank you. And at this time we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from Xian Siew with BNP Pariba. Please go ahead with your question..

Hi, guys. Thanks for taking my question. It's nice to see the improvement on a monthly basis for the retail numbers. Just wondering, has that continued into July? And then last time you talked about potentially a slow start to the season and weather kind of delaying some registration of units. I think given your own, you mentioned something like 4,000.

Did that show up in the data, like the May or June? And how do we think about retail excluding those, I guess, shifted registrations?.

Yeah. Thank you for your question. Good question. I think July is strong, I think. Actually, P&A is extremely robust in the first three weeks of the month. I think retail overall is try and see why the trends would not continue.

The only – it's somewhat difficult partway through a month to predict exactly how the month is going to end up, because dealers tend to prioritize getting boats on the water and then the registrations come in the back half of the month, but nothing tells us anything materially different there.

And the more kind of contemporary data that we get around P&A and on-water participation is very, very strong in July..

I would say also some leading indicators like financing applications are about the same as year-over-year versus last year..

Okay. Got it. Thanks. And then I wanted to ask about Freedom. You mentioned it's up to like 6% of the Boat division revenues.

But wondering how much of the flywheel is kind of kicking in? Is there a way to frame like how much sales of like P&A and propulsion are go into Freedom as well because that's the higher usage and the need for maintenance of those – that boat fleet. Just wondering how that is going..

Yeah. Well, Freedom is growing very fast organically and also because of the acquisitions that we made in 2021 and early this year, those are being integrated extremely strongly.

I think one of the metrics that's worth looking at is on a kind of a same-store base, if you like, or same location basis, membership growth in the second quarter of this year was up 30% versus last year, which indicates a lot of strength. I would say that, yeah, boat sell-through and engine sell-through and P&A sell-through are very strong.

One of the things this year, though, is that because of boat availability, Brunswick Boat Group was only able to supply about a-third, about a-third of the boats that Freedom needed. So the balance was secured from other OEMs. And over time, we will be building that percentage up to in excess of 75%, I would say.

That opportunity to grow the Brunswick portion of the Freedom fleet is also, if you like, another, if you like, a safety valve on retail. I mean there are several thousand units of potential growth in Freedom that we need to accommodate in addition to building supply -- building the inventory and pipeline for the balance of the year..

Thank you. And our next question comes from James Hardiman with Citi. Please state your question..

Hey, good morning, guys. Thanks for taking my call. So I wanted to hone in a little bit here on the Boat segment. Obviously, a pretty big beep there, at least versus our numbers.

I guess first, do you have a wholesale unit number you can share and whether or not sort of that production has been raised for the year? I guess one of the things I'm trying to square is it seems like better unit shipments in the quarter versus retail that was, I think, safe to say, weaker than expected.

At least through the whole quarter two, it sounds like it was better. Square those two things along with this notion it's not just you saying it.

MarineMax said it today, every dealer we say -- we talk to says that this notion that supply is ultimately holding back retail even though shipments seem like they're better and inventory seems to have built a little bit..

Yes. James, I think Ryan kind of take this one a little bit. I think the situation has improved somewhat in inventory. And certainly, supply is in aggregate better than it was. Although we had some continuing challenges, I would say they're more isolated than they were before, which is -- and Ryan will give you data some on shipments.

The position on the kind of supply-demand balance, I would say supply is clearly governing in fiberglass, particularly in large fiberglass. Essentially everything that we make is pretty much retail sold. I would say the northern markets, which are mostly the aluminum markets, were the ones most affected by the late summer. But retail is catching up.

But we certainly were able to build a bit more inventory in those northern markets and aluminum fish, which tends to be a shorter season. So it's a little bit of a bifurcation. Generally, supply is continuing to govern a lot of our retail, but not equally across segments..

Yes. That's right. And James, good morning, James. our Q2 wholesale was just over 10,000 units, which actually is the first time we've gotten 10,000 units out in the quarter since the second quarter of 2018.

So supply chain, still enduring issues throughout the lineup, but certainly better than it was year-over-year, and we were able to keep up a pretty nice production schedule. As Dave said, I think we've said on a couple of quarters in a row, we think it's critical to get inventory in the hands of our dealers to continue to spur retail.

You're just not going to get a lot of walk-in customers should there not be any boats on the lot. So we feel like this is a really nice quarter across the boat group..

Yes. I think, James, one thing to think about on a kind of dealer basis, even in aluminum fish, you have five or six boats at a dealer. So they haven't to sell-through very high proportion of their inventory every month and every quarter. And they don't have the model diversity and availability of options necessarily that they would normally have..

Makes sense. And maybe by way of a follow-up, related question. I mean you've talked in the last couple of quarters about not getting back to normalized inventory levels until 2024.

Is that still the case? And I think you know where I'm going with this question, right? I'm sure you've heard this developing bear case that the boat industry is essentially heading down the same path as RVs, which as you know, talked about this multiyear replenishment cycle, and that was ultimately pretty quickly condensed into a couple of quarters.

So maybe speak to that idea..

Yeah. I think we're in a very, very different place to the RV industry. I won't attempt to speak for the RV industry, but obviously, we follow what's going on there.

And I would say that we are continue -- I mean if you looked at the data, even though we're 55% down on 2019 globally, we're more than 60% down in the US, which means boat availability continues to be very constrained. And although we're building some inventory in some segments, we're not building fast enough to create that issue.

I would say it's very clear that broadly in the fiberglass segments, probably, I think, pontoons, we're talking about -- still talking about 2024 for a normalization of pipelines. It's possible that it might be a little earlier in aluminum fish, for example. But it's -- our inventory levels are still very low, so it would take a lot to rebuild.

So I would say the thesis is pretty intact, just a bit more nuanced maybe by segment..

Got it. Makes a lot of sense. Thanks guys..

Our next question comes from Kevin Heenan with JPMorgan. Please go ahead..

Hi. Good morning, guys. Thanks for taking my question..

Hi, Jason..

I just wanted to ask on the Propulsion segment, can you just talk about the visibility you have to the demand for the new production that's coming on later this year in terms of new OEMs lined up or lines of business that may have been underserved as well as the margin impact of that new product that's coming online? Thanks..

Thank you very much. Great question. We have very high visibility, extremely high visibility down to an OEM and every other level on where that additional capacity will be dispositioned. We are genuinely extremely excited to get that capacity on board.

I mentioned -- we mentioned in the calls that although we have focused a lot of our commentary on the US market, we are gaining share very quickly elsewhere. I wouldn't be surprised we crossed 50% in Canada pretty soon. We're building in all the European markets Australia, New Zealand we continue to be extremely strong.

So that capacity has a lot of clear destinations, not only in the US but internationally, too. And generally, the margins will be strong. We're not only fulfilling these new OEMs and international OEMs, which tend to have higher margins.

But it will also give us the capacity to really get after the repower channel and the commercial channels, which are generally extremely strong margins. So the additional benefit of every unit capacity we get out is not only the value of the unit is the incremental margin associated with marginal units.

However, I could not -- I cannot wait to get that capacity online. It will be a very exciting time for us..

Great. And if I could just quickly follow up on the P&A side. You said that July had improved. Do you see that business up on an organic basis in the third quarter? And any change to that? I think the full year outlook had embedded a mid- to high single-digit organic growth figure. How do you see that today? Thanks..

Yes. Kevin, I'll take this one. Yes, I mean, we would anticipate growth in the back half organically. Listen, this is really a tale of a different quarter. The first quarter -- the first part of the quarter really was slow because of weather. And it certainly accelerated in June, and we're seeing that in July.

But when you say P&A, when we say P&A, there's really distinct buckets that you've got to look at. Engine P&A, which is the most profitable section of our P&A., and the US was actually up quarter-over-quarter, slightly but up even despite the poor weather.

Internationally, that business suffered a little bit more from freight delays and some supply chain issues. But in the US, that business remains strong. The distribution business, which has gotten probably a little bit more attention than necessary this morning, remember, that's just a third-party distribution business.

So we on sell the product from companies that use our network because we have such a global network. And frankly, there were several core customers that were struggling to get products out to us in the quarter. And obviously, that means we can't forward them along.

That business, although for a distribution business that almost 10% operating margins, is a fantastic business. But when you look across the landscape of P&A, it's still relatively modest from an earnings standpoint.

The last thing I would say, the ASG, Advanced Systems Group, business is the core businesses, the legacy businesses, so it's basically everything Navigo, also had a really strong quarter for the OEM side particularly. And then Navigo obviously did continue to do well as well. So, we are not concerned at all. The usage patterns still remain very strong.

And I think you'll see in the back half of the year some really nice results..

That was a great commentary. One other thing was kind of big-box retailer and online retailers have normalized their stocking patterns, but they were And we have worked our way through that now.

So orders are flowing again from the big-box retailers and online retailers, and we're seeing that coming into -- that essentially actually resolved itself at the end of the last quarter..

Thanks very much guys..

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

Hi, good morning. Thanks for taking my question. Earlier in the script, you talked about how any moderation in the back half of the year from inflation would be factored into pricing strategies. Can you maybe expand on what you're saying here, maybe pricing increases would moderate if inflation moderates, just any help here..

Yes, certainly. So, yes, I mean, we essentially have been pricing to cover inflation for some time now. Obviously, we're a long-term player in the industry. We don't want to see prices increase and drive people out of boating or any other sector in which we participate.

So, our plan is to continue to cover inflation, but with hopefully some moderation that will allow us to moderate pricing as well. We still plan to cover inflation now, and that is baked into our forecast..

Great. Thanks. And turning to Freedom, nice to see that membership growth was even higher than in the same quarter on a same-store basis.

Can you talk about what you think the key drivers here is that there's greater expanded fleet? So units are able to better fulfill demand in their regions, or what do you think the key driver there is?.

So I think awareness is definitely a driver. The larger Freedom gap, I don't know, I can't remember the last week that I didn't see a new story on a Freedom location or Freedom as an entity. So, broad awareness has been growing significantly.

And I think the benefits of the Freedom model to get people on the water, particularly those people who are time constrained, but maybe about the commitments that don't allow them to do some of the other parts of boating, it's just become more obvious to people the benefits of the model.

Certainly, we are refining the model and making sure that as we grow, we're keeping our service levels intact, enhancing the brand, enhancing the boats, getting more diversity of boats into the various fleets. So I think we're doing everything we can to make the experience more attractive. And then awareness is growing really quickly.

And as I mentioned recently, searches for Boat Club were even higher this year than last year. And if you look across a whole range of metrics, that's not -- that's a pretty nice situation to be in..

Great. Thanks, David..

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

Hey, guys. Good morning. Could we just go back to the P&A segment? It looks like there's a pretty big margin improvement embedded in the full year outlook even though that full year number came down.

Can you just explain sort of what's driving that and what gives you that confidence as we look into the back half?.

Yes. Fred, I'll take that again. So we've taken on a lot of inflation in the first half. I think that's -- we've talked about that on most calls. And we believe some of that is going to moderate here as we come to the back half of the year. There's also some mix components in there.

As we look at the back half, volumes in the second half are generally a little bit lower just by nature, that's kind of year in and year out. But that's a factor as well..

Some of our pricing was mid-May pricing. So we did not get the full impact of pricing in the quarter. We'll get the full impact as we go into Q3 and Q4..

The last thing I'd probably mention is Navico. Some of the cost synergies that we've been looking to put in will give a little bit more benefit in the back half and certainly into 2023 as well..

Okay. That's helpful. That makes sense. If we just look at the repurchases, I think there was a comment in one of the releases or materials talking about similar levels in 3Q versus 2Q. And that would seem to imply that you'll be pretty close to that $400 million number.

I mean is -- should we view that as sort of a floor type number? And sort of how do you think about repurchases in the current environment going forward?.

Yes. Fred, we've given ourselves plenty of flexibility as we continue to see the dislocation, not only in our own stock price, but in the sector itself. I would tell you that $400 million is certainly likely to happen. And we have the flexibility to go higher than that, should we do more in the third quarter, should valuations be appropriate for that..

Perfect. Thank you..

Thank you. Our next question comes from Scott Stember with MKM Partners. Please go ahead..

Good morning and thanks for taking my questions..

Good morning..

Good morning..

David, in your comments, you talked about not seeing any wholesale cancellations on the boat side. And apparently, the consumer is holding up a lot better than expected, at least in your world.

But can you talk about trends that you're seeing? Are people -- with rates going up, interest rates, are they just switching more towards cash? And if so, what's the percentage of cash purchases this quarter?.

Yeah. I don't actually know what the percentage of cash purchases this quarter. I do know because I looked at the first couple of weeks of July that financing applications in July this year essentially identical numbers, that we see anyway, to last year.

I would say that credit spreads have certainly increased, and the duration of loans probably gone up. I was at a dealership looking at 20-year plus loans on various products. So people, I think, are accommodating their monthly payment tolerance by looking at various means, including extended loan periods. And yeah, I mean it clearly is differentiated.

Most of our applicants that we see are prime applicants. So the -- I was looking at the kind of prime to non-prime credit quality this year, it's pretty similar to last year, too. There may be some people using cash. I think that's probably more likely in the -- ironically, in the more premium segments where people are doing that.

So yeah, we haven't seen a lot of change. And even though credit spreads have increased, people seem to be relatively tolerant to that. If we do see something, it's more likely to be in the value segments. But so far, its holding up pretty well. And certainly, premium is holding up extremely well..

Great. And just a follow-up question. Ryan, you talked about 10,000 units, I guess, being shipped in the quarter.

But for the full year, are we still on track for -- I think the number was 40, 000?.

Yeah, I think we'll be -- we'll likely be just shy of that. We'll probably be closer to 39,000. But we did 94 in the first quarter or so. We did just over 10. The back half, as a reminder to everyone, has a bit of calendarization. We have some factory shutdowns that obviously the holidays in the fourth quarter, so you do have fewer production days.

But I think 38,000, 39,000 is still a really good number..

Great. That’s all I have. Thank you..

Thank you..

Our next question comes from Mike Swartz with Truist Securities. Please state your question..

Hey guys, good morning. Just wanted to dig into the P&A business. I'm just a little confused with some of the commentary on the guidance, which you lowered. So I'm just wondering, I mean, the seasonal part of the business, the boating season started a little slower. I would assume most of that comes back later in the year.

So, is the guidance reduction more on the distribution business, or I guess how should I think about that?.

Yes. Mike, it is a lot -- it is heavier weighted towards the distribution side of things. It's also a little bit on the Navico side, as Dave said earlier, about the restocking patterns at retailers. But unfortunately, to your first comment, you do lose a turn of P&A due to a later season. You often just lose it for the season.

If you don't get boats in the water until mid-May or end of May versus same time in April, it's unlikely to get that back. The good news, though, is P&A backlogs continue to be very strong. Supply chain still hits there as well. And so, we're dealing with some of that. But all in all, it's kind of nits and nats in the various places.

But certainly, it's not a function of usage kind of from the start of the better weather forward through the year..

Got you. And I think, Dave, you made the commentary around some of your aluminum fishing businesses, how you've allocated more of the production towards premium models.

Is that -- I guess is that being driven by what you're seeing in consumer demand? A lot of us are hearing out there, obviously, the value end of many of the power sports truck creational markets are softening to a greater degree than maybe premium.

So, is that just a reaction to that or something else strategically that you're doing internally?.

Yes. I think a couple of thoughts, really. It's -- I would say, it's mostly strategic. I would say, obviously, we're on a multiyear process of expanding boat margins and so we want generally to produce higher-margin models.

In a supply-constrained environment, which we've been generally operating in, if you have one of something, whatever it is, it's better to put it on a high-margin model than a low-margin model. And that could be an engine in windshield control. So, protecting high-margin models has been a priority for us.

I would also say that for the last three years, I've been saying that we are not going to fight for every last unit of aluminum value product. We are on a multiyear course of elevating our boat margins.

That area of the business is more populated by a lot of smaller players, some of whom have come back online after being off-line due to supply constraints last year they were less robust.

So, we're just being cautious about making sure that we continue that margin journey and don't spend a lot of constrained supply chain parts on that portion of the business..

And Mike, maybe one more to circle back. And while we were trying to avoid talking to FX too much from this call, but if I look at the back half of P&A sales, I mean, half of the impact of FX for the year is related to P&A. It's about half Propulsion and half P&A. That's $140 million sales impact. So right there is several points.

So, still a number of factors, but we still showing good results regardless..

Great. Thanks for that color. Appreciate it guys..

Our next question comes from David MacGregor with Longbow Research. Please state your question..

Good morning. This is Joe Nolan on for David MacGregor..

Hi, Joe..

Hi. I just had a sort of a follow-up to the prior question.

With your focusing production on more of a premium product, can you just talk about the pace of orders and how this split between lower price boats versus premium products?.

Yes. I think, orders -- wholesale orders are very strong across all of our boat brands at the moment. There isn't a dealer who doesn't want more boat brands. It doesn't really matter what the boat type is. So we continue to do everything we can to try and satisfy that demand.

I think that, although, the supply constraints are being felt somewhat more acutely in the premium end of the business, as I mentioned earlier, even have Aluminum Fish end of the business, our dealers are well below their normal stocking levels at this time of the year. So, yes, our orders are holding up very nicely..

Got it. Okay. Thanks for that. And then, just a quick follow-up. Mercury seems to just keep gaining share. Can you talk about some of the areas where you're having the greatest success, whether that's buying horsepower, type of boat or by geography? Thanks..

Everywhere is the answer at the moment. But I would say, we focus particularly on higher horsepower, not to the extent that we don't do a lot of work in every segment.

It just -- as we noted, we just introduced a brand new 25 and 30-horsepower engine, which takes some of the technologies that we introduced in the higher horsepower segments and migrate it downwards. So we're making sure our product line is robust from top to bottom.

But I would say that, we're still the only manufacturer that has any product even above 425 horsepower. We have our 450. We have a 600. We have a 500. So there isn't even any competition to us at the top end of the horsepower range. A demand for our high horsepower and mid-range is still extremely strong.

I think, we've shown to be a very reliable supplier, and that is benefiting us pretty much everywhere. As we get more capacity, it is all allocated either to new OEMs, expanded market share or share of transfers in existing OEMs, repower, international markets. So there is no reason why our share gains would not accelerate as we get that capacity on..

Great. Thanks for answering my questions..

Thank you..

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

Hi. Good morning. I guess, staying on engines for a second. You mentioned the capacity expansion coming online this year -- later this year. It's about 50% on your 175-horsepower and above. I guess two questions there.

One, what percent of your engine sales does that represent in terms of dollars? And when would you expect to get to optimal utilization levels with this new capacity?.

Hi. Good morning, Joe. I'll take this one. 150-horsepower and above is about 60% of dollars. And below 150-horsepower is about 40%. So the swing factors are the always 150 which is obviously a big value. So you can imagine that this represents half or maybe a little bit less of the overall revenue of Mercury's propulsion business.

And then in terms of full run rate, I mean, this is obviously not a light switch. You will see benefits in the fourth quarter. Certainly, I think as you look at the guidance, one of the reasons we took propulsion sales guidance up is the capacity coming online in the fourth quarter and it will continue really into next year.

So, whether it is Q1 or Q2 of next year, that's probably when you'll see the full run rate. A bit of it does depend on supply chain and suppliers. And to this point, they've been great partners as they always are to Mercury. But that's when I think about the full run rate kind of mid next year..

Okay. It's very helpful. And maybe for Dave, just to clarify your comments earlier on the call on pricing.

Are you saying we could see a moderation of price increases as cost inflation eases, or could we even see some rollback of recent price increases if input costs actually do come down?.

No, I was saying, the former that we will see, hopefully, the opportunity to selectively moderate pricing. Obviously, inflation – price inflation has been higher than normal for some time now and we're very cognizant of that. I do not expect any price rollbacks.

If we need to stimulate demand, we don't at the moment, but if we did, it would be more likely through promotional activity, not a rollback..

Okay. Thank you..

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

Hey, thanks for squeezing me in here. Ryan, you made a point on FX, and that point is well taken in terms of effect on the income statement.

I'm just curious, has there been an impact on the competitive dynamic in the Propulsion category?.

We don't believe so, Craig. But obviously, over time, in any of our non-US competitors, their pricing is – it's their, obviously, their responsibility and we just can't comment on anything they do on pricing. But to date, not – we've not seen any material changes..

Great. Thanks for the call..

Thank you..

Thank you. And we have run out of time for questions today. At this time, we would like to turn the call back to Dave for some concluding remarks. Thank you..

Thank you very much. Thank you all for joining us today. I think this quarter once again demonstrates the evolution of our business and our ability to continue to perform strongly and advance our strategic initiatives even in the face of many headwinds. The improving retail data at the end of Q2 also demonstrates the resilience of the boating consumer.

And I think in early July, we're seeing P&A rebound very nicely in a way that suggests that boating consumers is very, very active. We innovate on behalf of that consumer to offer the best boats, engines, experiences, alternative ways to participate.

And we are very much looking forward to sharing more detail on that with the investment community in November this year when you will see, I expect, the most exciting array of new products that you have ever seen. So we will look forward to sharing that with you later in the year. Thank you..

And that concludes today's conference. All parties may disconnect. Have a great day..