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Text: Please keep in mind that our actual results could differ materially from these expectations.
All of these documents are available on our website at brunswick.com.
Our businesses had another outstanding quarter.
We've now delivered our fifth consecutive quarterly record for adjusted operating earnings and earnings per share as a result of our robust operational performance, successful mitigation of supply chain challenges and active management of overall cost inflation throughout the enterprise.
Despite challenging comparisons to last year, retail demand for our products remains extremely healthy.
And we continue to take market share with our Mercury outboard engines in many of our boat brands.
In addition, Freedom Boat Club continues to grow its membership base as we rapidly expand this very successful and synergistic shared access participation model.
Robust retail demand for our products has driven field inventory to the lowest level in decades at just over 10 weeks on hand.
We continue to increase production to meet demand across our businesses though in some cases, supply chain constraints are limiting our ability to overdrive our production plan.
As we close out 2021, we're focused on elevating production levels to meet demand and refill field inventory during the retail off-season, integrating Navico and our other acquisitions, progressing our strategic initiatives and closing the most successful year in Brunswick's history while laying the groundwork for the Next Wave of success in 2022.
Our businesses are focused on closing out another year of robust earnings and shareholder returns with strong margin growth and substantial free cash flow generation, resulting from our outstanding operational performance in a healthy marine market, and we have increased our 2021 guidance accordingly.
Before we discuss the results for the quarter, I wanted to share with you just a few of the awards and award nominations that Brunswick received during the third quarter.
For the second time in three years, Brunswick and Mercury Marine were jointly presented with a Soundings Trade Only Most Innovative Marine Company award at the IBEX trade show in Tampa last month.
The panel of judges praise Brunswick and Mercury for a record setting 2021, filled with multiple industry-changing product launches such as the V-12 600-horsepower Verado outboard engine and the Sea Ray 370 Sundancer among others.
Additionally, Brunswick and Mercury were commended for committing to the health and safety of our employees and for our extraordinary efforts to continue meeting customer demand during the global pandemic.
Brunswick has also been recognized for the second consecutive year by Forbes and Statista as one of the World's Best Employers.
Of the thousands of companies eligible for this recognition, Brunswick was one of only 750 companies selected to receive the award, ranking in the top 10 companies in the world within the engineering and manufacturing category.
Brunswick is also thrilled to be nominated for several other major awards, including a Consumer Electronic Show Best of Innovation Award, five STEP Ahead awards recognizing women in manufacturing, five Dame product design awards from METSTRADE, three international Best of Boats Awards, two European powerboat of the year awards and two IBI Boat Builder awards.
Our commitment to democratizing and diversifying boating and the boating industry is central to our strategy and vital to ensuring our access to talent and to the continued growth of our customer base.
In past quarters, we provided updated demographic trends and insights around first-time and recurring boat buyers as well as demographic changes.
I'm pleased that we are not seeing any pullback in the encouraging trends we experienced during 2020.
We're also continuing to see Freedom leading the way with these demographic shifts.
Since 2019, Freedom has seen notable increases in the ethnic diversity of our members, which grew from around 10% in 2019 to 15% now and the percentage of women making up our total member base, which grew by 130 basis points to 35%.
Also, a particular note, the percentage of Hispanic Freedom members almost doubled to 8.4% in 2021 from 4.7% in 2018.
We're very encouraged by these trends that will help secure a healthy future for Brunswick and the entire marine industry.
I'd also like to share with you some consumer insights gained through the polling of Brunswick's Ripl online boating community, which includes both new and seasoned boaters.
Of those surveyed, approximately 60% worked remotely at least partially, and 44% of those polled have been able to fit boating into their work week this season, with more than 20% actually working from their boat at some time.
Most people who fit boating into their work week during 2021 expect to continue doing so during 2022, which further supports our belief that persistent changes in the way people work will provide more opportunities for people to get out on the water and maintain boat usage at elevated levels versus pre pandemic.
I'll now provide some third quarter highlights on our segments and the overall marine market.
Our Propulsion business delivered another quarter of significant top line and earnings growth, with more favorable customer mix leading to stronger margins than anticipated.
Over the last two years, Mercury has gained an extraordinary 310 basis points of U.S. retail market share with outsized gains in higher horsepower products, where a significant amount of investment has been made in recent years.
Outstanding execution, robust aftermarket demand driven by elevated booking participation and favorable late season weather conditions in many areas resulted in our Parts and Accessories businesses overdriving expectations in the quarter.
In addition, our Advanced Systems Group announced the tuck-in acquisitions of RELiON Battery and SemahTronix during the third quarter to further complement its existing portfolio of lithium-ion batteries and to vertically integrate complex electrical wiring harnesses, respectively.
These acquisitions, along with the closing of the Navico acquisition earlier this month, will further strengthen our enterprisewide ACES strategy and enhance our ability to provide complete innovative digital solutions to consumers and comprehensive integrated systems offerings to our OEM customers.
Finally, our boat business continues to deliver strong top line growth in a disrupted environment.
Despite supply chain challenges, cost inflation and labor tightness at our suppliers and some of our own facilities during the quarter, we anticipate annual unit production of greater than 95% of our original production plan for the year, with shortages and delays primarily constraining additional upside.
By comparison, our Propulsion business is anticipated to produce approximately 110% of its original 2021 production schedule.
Finally, Freedom Boat Club continues to expand rapidly while attracting a young and diverse customer base.
Freedom is now approaching 320 global locations and 47,000 memberships networkwide with more than 4,000 boats in its overall fleet, including an increasing percentage of Brunswick boats and engines.
Next, I'd like to review the sales performance of our business by region on a constant currency basis, excluding acquisitions.
As expected, all regions posted significant sales growth in the quarter versus both 2020 and 2019.
Except for Asia Pacific, we saw sales normalize slightly in the third quarter but still up 26% versus the same period in 2019.
Domestic sales grew 14%, with international sales up 17% versus the prior year.
This table provides more color on the recent performance of the U.S. marine retail market, comparing the first nine months of 2021 to the same periods in 2020 and 2019.
The year has played out largely as we expected with easy comparisons through the first portion of the year, primarily due to the impact of COVID in 2020 and more difficult comps beginning in May.
Since our July earnings call, the industry has experienced more pronounced supply chain disruptions than anyone anticipated, which, together with the more direct impact of the Delta variant, has led to a more significantly inventory-constrained retail environment.
The result is a reported 8% decline in main powerboat retail unit sales year-to-date when compared with the same period in 2020 but still 3% greater than the same period in 2019.
Brunswick's year-to-date performance is generally somewhat ahead of the overall market with outsized market share gains in aluminum products.
Outboard engine unit registrations were down 6% through the first nine months of 2021 when compared with the same period in 2020, with Mercury outperforming the industry.
Mercury's outboard engine unit registrations compared with the same period in 2019 are up more than double the industry's market growth rate, resulting in a significant market share gains we've experienced in recent years.
It's important to note that all indications are that retail declines are being driven by product availability and are not a result of declining consumer demand.
U.S. lead generation, dealer sentiment and other leading indicators all remain very positive.
For example, all of our 2022 model year and 80% of our 2022 calendar year production slots are already sold out.
And we continue to see a significant percentage of boats leaving our manufacturing facilities already retail sold.
All these factors give us high confidence in the continuing retail strength as we enter 2022.
This slide provides some perspective on the impact of inflation on our businesses, together with our ability to take price increases to mitigate the net impact.
Based on our early view of price inflation in the third quarter, we implemented higher than normal annual price increases in July to mitigate the anticipated levels of input cost inflation in the back half of the year.
However, input cost inflation has exceeded our estimates, so we've implemented additional price increases during October in both our Propulsion and Boat businesses to ensure that we cover inflation with pricing on a full year basis.
Between direct materials, labor and freight, we anticipate input cost inflation to be in the high single-digit percent range versus 2020 on a run rate basis, with a significant majority of the impact felt in the second half of the year.
Consequently, we may need to take further mid-cycle increases and/or higher-than-normal increases in 2022.
However, we believe the price increases we've implemented to date are generally at the lower end of those implemented across the industry and are not impacting raw demand.
Our businesses delivered another outstanding quarter.
When compared with 2020, third quarter net sales were up 16% with adjusted operating margins of 15.5%.
Operating earnings on an as-adjusted basis increased by 9%, and adjusted earnings per share was $2.07, once again setting new all-time highs for any third quarter for which we have available records.
Sales in each segment benefited from increased volume due to strong global demand for marine products, market share gains and increased pricing with earnings positively impacted by increased sales and favorable changes in foreign currency exchange rates, partially offset by increased input costs and increased spending on sales, marketing and ACES and other growth initiatives.
First nine month comparisons are also very favorable, with 2021 net sales up 39% when compared with the first nine months of 2020 and adjusted operating margins of 16.5%, a 290 basis point improvement from 2020.
This resulted in adjusted earnings per share for the first nine months of $6.82 and a very robust operating leverage of 24%.
We have generated almost $300 million of free cash flow through the first nine months of the year, which is a strong result considering the incremental working capital needed to satisfy increased needs for inventory as we elevate production levels and the $60 million increase in capital spending when compared to the same prior year period.
Turning to our segments.
Revenue in the Propulsion business increased 19% versus the third quarter of 2020 and was up 58% versus Q3 of 2019.
Strong demand for all product categories, together with market share gains, drove higher sales, which continue to be enabled by increased production levels.
Operating margins were flat versus 2020 but up 320 basis points versus Q3 of 2019 as pricing, favorable absorption and benefits from more favorable sales mix were able to offset higher manufacturing costs, primarily caused by material inflation.
In our Parts and Accessories segment, revenues increased 7%, and adjusted operating earnings were up 2% versus the third quarter of 2020.
Adjusted operating margins of 22.2% were down 120 basis points when compared with the prior year quarter and were negatively impacted by the closure of a key manufacturing and distribution location in New Zealand for a significant portion of the quarter due to national COVID lockdowns as well as increased spending on growth-related investments.
Favorable late season weather in many regions is allowing for increased boating participation, which should continue to drive aftermarket sales in Q4 and into 2022.
In our Boat segment, sales were up 22% and adjusted operating margins were down 230 basis points to 6.9% when compared with the third quarter of 2020.
When compared to the third quarter of 2019, sales were up 45%, and adjusted operating margins were up 240 basis points.
Sales increased in all product categories with particular strength in aluminum freshwater, including our pontoon businesses.
Increased sales volume and pricing together with lower retail discount levels versus prior year were offset by material inflation, higher cost due to manufacturing inefficiencies and increased spending on growth initiatives, resulting in slightly lower segment operating earnings.
Freedom Boat Club, which is included in Business Acceleration, contributed approximately 3% of the segment's revenue at a margin profile that continues to be accretive to the segment.
As Dave mentioned earlier, we believe our boat production will reach at least 95% attainment of our original production plan for 2021, a remarkable achievement given the current supply constrained environment we are working in.
Supply chain challenges, including delays in receiving certain components, has resulted in the deferral of shipping certain nearly completed boats to subsequent quarters.
As a result, we wholesale sold approximately 8,200 boats during the third quarter, which was roughly the same number of units sold at retail and 16% greater than the number of units wholesale sold in the third quarter of 2020.
This keeps dealer inventories at an all-time low of approximately 7,400 units.
Our boat brands ended September with just over 10 weeks of boats on hand, measured on a trailing 12-month basis, with units in the field lower by 27% versus the same time last year.
As we head into the fourth quarter, our businesses are focused on closing out another year of robust earnings and shareholder returns with strong margin growth and substantial free cash flow generation resulting from our outstanding operating performance in a healthy marine market.
Although we continue navigating certain headwinds, including elevated supply chain, labor and transportation costs and challenges, we are confident that we can continue to drive growth and innovation as the clear leader in our industry.
Now including the projected benefits from our closed acquisitions, including the acquisition of Navico, we are providing the following updated guidance for full year 2021.
We anticipate the U.S. marine industry retail unit demand for the full year to improve from reported year-to-date levels, ending at close to flat versus 2020, net sales of approximately $5.8 billion, adjusted operating margin growth between 150 and 180 basis points, operating expenses as a percent of sales to remain lower than 2020, free cash flow in excess of $425 million and adjusted diluted earnings per share of approximately $8.15, which represents a 61% increase over 2020.
Note that we believe acquisitions will contribute about 10% of the fourth quarter's revenue growth but will be neutral on earnings per share after including the impact of additional interest costs related to the financing of the Navico transaction.
I will conclude with an update on certain items that will impact our P&L and cash flow for the remainder of the year.
The only meaningful update relates to our effective tax rate for the year due to some favorability related to foreign branch income and certain state tax law changes, we now believe our effective tax rate for 2021 will be approximately 21.5%, which is slightly lower than our estimate from the July call.
We have also updated our guidance associated with working capital and intangible amortization associated with our completed acquisitions.
Similarly, our capital strategy assumptions have not materially changed with the execution of the financing for the Navico transaction, creating a slightly higher interest expense for the year, with approximately $25 million of additional debt retired as a result of the tendering of our 2023 and 2027 notes during the financing process.
We anticipate ending the year with debt leverage of 1.7 times on a gross basis and below 1.5 times on a net basis.
Additionally, our $43 million of share repurchases in the third quarter brings our total share repurchases for the year to just shy of $100 million, and we have adjusted our guidance to show that we anticipate reaching approximately $120 million worth of share repurchases by the end of the year.
Very solid operational execution by our businesses has us squarely on track to deliver an outstanding 2021 as we execute against the operating and strategic priorities we've discussed throughout the year.
Our top priority for the Propulsion segment continues to be satisfying outboard engine demand from new and existing OEM customers and expanding market share, especially in dealer, saltwater, repower and international channels.
We're continuing to invest heavily in new product introductions and industry-leading propulsion solutions that we project will enable top line and earnings growth far into the future.
Our accelerated incremental capacity projects remain on track for completion by the second half of 2022 and we believe will allow us to gain additional customers who have already expressed their interest in being supplied by Mercury.
Our Parts and Accessories segment remains focused on optimizing its global operating model to leverage its distribution and position of strength in areas of battery technology, digital systems and connected products in support of our ACES strategy.
We are keenly focused on our thoughtful acquisition integration activities for Navico, RELiON and SemahTronix.
And we will continue to focus M&A activity in higher technology, systems and Parts and Accessories businesses as we review opportunities to further build out this increasingly large, high-margin recurring revenue portion of our business.
The Boat segment will continue to focus on launching new products, executing significant capital expansion plans, increasing its efforts to become more vertically integrated to help mitigate future supply chain issues and refilling pipelines in a very robust retail environment.
Freedom also continues to expand its footprint with the recent acquisition of the Connecticut territory, which has seven locations and over 600 memberships.
Combined with the purchase of the New York territory earlier this year, we can now take advantage of cost and other synergies in the Northeast U.S. region and can more quickly expand the number of locations.
We've already begun to see positive early returns from the completed Advanced Systems Group deals with RELiON winning new business from significant OEM and retail distribution customers.
In addition to the Connecticut acquisition early in the fourth quarter, Freedom Boat Club continued its international expansion plans with the acquisition of Fanautic Club in Spain during the third quarter.
We believe that our pace in rapidly expanding these future-orientated recurring revenue businesses will further distance us from potential competition.
As most of you are aware, we're also beginning to see the resumption of in-person boat shows like the Fort Lauderdale Boat Show that kicked off yesterday.
And early in September, we participated in the Cannes boat show, one of the most important European events for our brands.
The feedback in Cannes from our channel partners and end consumers on the new V-12 600-horsepower Verado and our new boat models was extremely positive.
Mercury reported double the number of outboard engines at the show than its closest competitor and significantly more outwards on display than all other manufacturers combined.
Sea Ray also reported a 65% increase in its revenue versus the 2019 show, while all other Brunswick brands on display reported strong consumer interest and sales.
We have continued to launch new products at a rapid pace across the enterprise.
On the sustainability front, we also reached another important milestone during the third quarter, with the Land 'N' Sea Kellogg Marine distribution operation becoming the third Brunswick location to achieve a zero waste to landfill designation.
And Mercury won an Association of Energy Engineers award for its newly installed solar array in Wisconsin.
We are working to further expand our sustainability initiatives, and we'll share more on this subject early next year.
Your hard work has enabled us to seamlessly execute our strategic plan and significantly outpaced our initial growth and profit expectations.

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