Yet Another Value Podcast - PJ Kurzweil sees smooth sailing ahead for BC

Episode Date: May 31, 2022

PJ Kurzweil, founder of PJ's SMID Cap Ideas, comes on the podcast to discuss his write up on Brunswick (BC). BC is a boat manufacturer, and PJ thinks they are too cheap and the market is missing how much more economically resilient the business is today than it was ~10 years ago.My BC notes: https://twitter.com/YetAnotherValue/status/1529822951016497153?s=20&t=lAssCowdwRLleeF1c1ZVEwPJ's BC write up: https://philippejkurzweil.substack.com/p/brunswick-corporation-1-pager-summary?r=1g9l5j&s=w&utm_campaign=post&utm_medium=webChapters0:00 Intro3:25 BC overview5:15 What is PJ seeing in BC that the market's missing?8:50 Is BC about to run into COVID pull forward headwinds?13:25 Sizing the boat market16:20 BC's recession risk20:10 BC's P&A business and recurring revenue26:00 Capital allocation and M&A multiples30:20 BC's vertically integrated model: advantage or overblown?33:50 BC's Freedom Boat Club optionality38:45 Share buybacks and insider ownership42:30 BC's improving free cash flow45:15 Is BC bringing capacity on right as demand falls off?47:30 Interest rate, inflation, and financing risks51:15 Rising gas prices effect on boat demand54:20 Vontier (VNT) and closing thoughts

Today's episode is sponsored by TIGIS. Understanding expert insights is table stakes for investors, and there's no better option than TIGS. I've been using them for almost two years to get up to speed on companies, and they've helped me immensely as an investor. TIGS also recently acquired BAM SEC, which adds a super fast way to access SEC filings and earnings calls and to incorporate financial data into my models. I run a monthly deep dive series sponsored by TIGS on the blogs. I'll include a link to my cable deep dive in the show notes, and I'd encourage you to follow the link if you're interested in how expert interviews

can help you learn more about a company. Currently, anyone who signs up for TIGIS gets free access to BAMSCC as well. So check it out. All right, hello, and welcome to the yet another value podcast. I'm your host, Andrew Walker. If you like the podcast, it would mean a lot if you could rate, subscribe, review it wherever you listen to it. With me today, I'm happy to have my first.

And PJ Kurzweil, he's the founder of, what is it's PJ's smitcap companies. Is that it? Yeah, smit cap investment ideas. That's right. The PJ smid cap investment ideas. Let me start the podcast, the way I do every podcast. First, a reminder to everyone that nothing on this podcast is investing advice. Please do your own due diligence, do your own work, consult a financial advisor. Second, with a pitch for you, my guess, I've known PJ4. It's got to be five or six years at this point. I remember you and I'm meeting at, is it LaPain? LaPen? I never know what to call them in New York. And you pitched me on Next Star, and I looked it up because I always kick myself when I look at Next Star because you were

pounding the table on it for six months with me. I think the stock was 45 at the time. And I just looked it up. The stock is like 170 right now. So that's just a casual five-year four-bagger plus a couple of percent of dividends thrown in along the way. So DJ is a smart guy. He follows all sorts of smith caps, you know, I'd say the general thing, which you'll see in his write-ups, the general thing PJ likes. Tell me if I'm wrong, PJ, it's companies trading net reasonable to cheap valuations, long-term secular growth stories. That's the type of stuff I generally like, too. But tell me if I'm wrong on that. No, that sounds about right. I would say first, I think we actually met originally with Diamond Resort. Oh, yeah. In the back of my head,

I was like, I think we did timeshares for a while. Yeah, I do remember that. Yeah, we shared some time with time shares. In terms of my focus, look, I try to find businesses that I think are just not properly understood. I think over time there's been a move towards quality bias in terms of businesses that can actually perform and have earnings and subsequent performance on the top line, bottom line be a catalyst of itself. So I would agree, I think valuation is a big starting point. as is recent stock performance. And then, you know, I look for things, you know, different boxes to check whether it's insider buying, buyback, corporate action, things of that nature that I think can help really move the company forward. Perfect. Perfect. And you know what? Time shares are probably

pretty interesting right now, too, because I just saw Hilton, which bought Diamond, just did it announce a big share buyback. That's a creative acquisition. The stock hasn't moved that much because of all the COVID factors. But we can go there a different time for a different podcast. Let's turn to the The company we're going to talk about today, the company is Brunswick. The ticker is BC, and I'll just turn it over to you. What is so interesting about BC today? All right. Well, maybe we'll take a step back.

Brunswick Corporation, it's been around for, I don't know, 180 years, listed in 1925. It's gone through a few different iterations as far as products. But currently, it's the leading manufacturer of marine equipment, so primarily engines. through their Mercury brand. They also manufacture boats. Boston Whaler, Sea Ray, Bayliner, Lund, really popular boats. I don't know, they sell somewhere close to 40,000 of those a year. And then they have a growing parts and accessories business that both serves the OEM market,

about 25% and then it's about 75% aftermarket. It's a $6 billion revenue company, gross margins, around the high 20%. 20s, but the margins are in the mid-teens, it's upper teens, just a really, a business that's evolved substantially. They got rid of their large boat segment. We could talk about that. They got rid of their bowling business. They got rid of their fitness business. So they really trim down and become this business that really has a tremendous market position in the marine industry that we think has a lot of good tailwinds. Perfect, perfect. And first question I always asked. That's great. First question I was asking, people can look, I did a lot of work on this

one. You gave me a brainer because they had, in the past 12 months, a major acquisition, not one, but two investor days, plenty of conferences and everything, but that's okay. It was labor love. But first question I always asked, markets a competitive place. Brunswick, this is not a small company. It's not Google, but this is a multi-billion dollar company. Everybody knows boats and everything. It's not crazy complex or everything. So grand scheme of things, when you look at Brunswick, what are you seeing that the market is missing that's going to lead to a risk-adjusted alpha opportunity here? That's a great question. Well, look, I think Brunswick has been around for a while, but I do think people associate Brunswick with being a boat manufacturer that loses a ton of money in a downturn and, you know, doesn't always make money in a normal cycle.

and I think that's really changed. Look, I think this falls under the category of a better business than people really understand. I think, you know, the parts and excess freeze business has grown substantially since the crisis, maybe four to five X. The marine engine business, you know, boats used to be 25% outboard engine. Excuse me, 25% outboard engine. That's when you have the engine at the back of the stern. Today, it's nine out of ten boats are outboard. And so really, the engine market is a duopoly.

So that's a really interesting thing where Yamaha and Brunswick control over 80% of that market. And so the engine opportunities are really a share gain opportunity and an OEM grab opportunity, just given the elevation in terms of the horsepower of the engine. And then the boat business, I think people are kind of coming around to the fact that there is a tremendous supply deficit in the market. COVID did see a bump in overall sales to around 220,000 boats in the categories that Brunswick participates in, but they were already kind of hovering at 200,000. So it wasn't like a huge, huge bump. But relative to the shock in terms of limited supply that year, it did create sort of a very big

air pocket in terms of supply and demand. And so when we look forward, relative to inventories, retail sales, and production, there's definitely sort of an embedded cushion in case retail sales come down. I would also say, look, Brunswick is a boating company. I mean, there are only three to four boating companies out there. It's consumer discretionary. And at this part of the economic cycle, there are lots of people who just think it's trash. And so I think you can find some varied opportunity there.

And finally, look, the business hasn't always been the best converter of free cash. If you look at the previous investor day, they thought they were going to do 450 million of free cash. And this year they're doing 350. And I think really the basis there is that they see so much opportunity to grow, particularly in the marine engine business, that they're really, you know, putting the pedal to the metal and really trying to set this business up for future growth. That's a great overview. And I hate to be a bear, but not a bear. I hate to push the bear case and not be optimistic. But, you know, I think we can dive into all the good things you talked about, the recurring revenue and everything.

But at today's price, you know, as we're talking on May 25th, the stock price is $72 per share. That's 7x this year's earnings guide. That's less than 5x. Their 2025 earnings guide, if you believe them. So, like, the market, I think you've got to talk more about the bear than the bullcase because the market is clearly skeptical here, right? Things don't trade at 5x. That's like, that's approaching not in today's goal market. but last year, I would have said that's almost a coal miner type multiple, right? So the market is

clearly skeptical here. And we can go into a bunch of things why they are skeptical. But the thing that jumps to me, and we'll probably attack this from a different ways, is COVID pull forward, right? And we saw this with a bunch of people. They had great sales in back after 2020 and 2021 because people didn't have anything to do. They couldn't travel all this. They had great sales. And I think the market's saying with with bc much like with with peloton peloton's the ultimate example right they literally built a factory because they had so much demand they couldn't keep up with it and when the factory get built they might just mothball it right they don't have any demand anymore they pulled forward all the man or i think RVs have seen something somewhere right at 2000 21 at the start

they could they could they brought a capacity and now like demand starting to normalize and i think they might be going into oversupply area. So I've done some work on RVs and all of them trade at Brunswick or lower than Brunswick multiples. And I think with Brunswick, what you might be seeing, hey, even right now, Brunswick is saying every boat that's coming off the lot for the next nine months, we've got a spot for it. But the market might be saying after that, you're going to have all this capacity. Brunswick's bringing a million a square feet of capacity online. After that, you're going to have all this capacity and demand might not be there. It might have all been pull forward. So you get that bullwhip effect, you know, so I said a lot there. I'll pause there.

what gives you confidence that kind of this bulwick effect that we saw with Peloton that we saw with the RBEs isn't going to happen to Brunswick? It's a great question. I think if you look historically, it's never really been a market that's become oversupplied. It has been more on the demand side that will kind of whip things a little bit. Look, I think in COVID, I think you pointed out one of your questions, there are about 10 million boats out there, and they're about 220,000 boat sales every year. There is a huge used boat market that obviously that doesn't replenish sort of the overall number of boats. A 50-year average useful life is probably too long. So if you kind of think about it, a boat lasting 30 to 35 years, that would imply a demand

simply to replenish the 10 million overall boats would be in the high 200,000s. And so we've historically undershot that a little bit. And some of that is because, you know, some of the stern drive and inboard drive kind of boats have not really recovered, whereas outboard boats have recovered. So there is this overall sort of replacement demand that's not quite being met. Also, if you kind of look at the demographics of the 2020 kind of COVID spike, you did see the average age of consumer come down a little bit, which implies that really they're tapping into a new market of younger consumers, which I think is pretty exciting. And so, you know, those are kind of the factors.

I do think secularly people are moving from blue to red states. They're getting closer to the water. They're getting closer to warmer weather. Work from home does enable some people to have a little more boat time. And fishing, it continues to become a more, more popular sport. I think 55 million people touched the fishing rod last year. And so, you know, I don't think boats are aware. one-time thing, and I do believe, look, it's a discretionary purchase. People don't have to

buy it. I will say that Brunswick's both 78% of them sell for under 50,000, so a lot of aluminum freshwater fishing boats. But I don't, you know, we're talking 200 to 220,000 to 10% increase. It's not like a doubled or tripled. So I feel okay. I feel solid that voting demand will be there. And in terms of Brunswick's forecast, I don't necessarily think they really depend on the retail market continuing to grow at any sort of, you know, incredible pace. No, I hear you, you know, just having looked at, especially the RV companies recently, I just can't get out of my head. Like, when I was reading the investor A or reading the Q1 call and they said every spot that we've got, there's a buyer for at the end of it right now.

And we've never had that. Our inventory days are super low. Like, I'm just having flashbacks to what the RV manufacturers and the RV guys were saying six months ago, nine months ago, and all their stocks are down like 40%. And they're actually still reporting great results, but the market's just saying, hey, like in two months, demand's going to fall off a clip or something. You did say something interesting that I just want to dig into right there. Like the market went from 200,000 boat sales to 220,000 boat sales at the height of COVID. And I put it in my show notes, and you mentioned it, 10 million boats out there and only

200,000 or so get replaced every year, even at 220,000, that seems low for, I think 30 years is probably the right for a boat. And for some of the higher-end boats, it's probably more like 15 or 20 years. It just seems low. Why are we under replacing, I don't know if under-replacing the world, but why are we so far below what I would think like the replacement rate for boat should be? It's a great question. I don't have a phenomenal answer. I will say that from round 92 a pre-global financial crisis, the average number of new boats sold a year was over 300,000. In terms of why the recovery has been a little slower, I don't have a great answer for you. It's something that I want to dig into a little more.

And if I come up with something good, I'll certainly revert. And you mentioned secular trends, and I am with you, like a little bit of a shift to red states, maybe a shift outdoors. It's like one thing I think people have underestimated with COVID is, you know, let's say golf there were a million golfers and then a million extra picked it up during COVID. Yeah, I'm sure all million aren't going to stick with it. But like to golf, it's a big investment. A lot of people might end up doing it. So is it 100,000 of the million stick around? 500,000?

I don't know, but they're not going to give up all those million. And for boats, like if it the people who move from blue to red, some might move back. But if you picked up boating, like some people are going to stick around, then they're going to stick around. then they're going to stick with boating. And it just makes sense like you do get this nice little tailwind of your sustainable base. And we'll talk about recurring revenue in a second. But your sustainable base is just like a little higher because more people got introduced to it. Yeah.

I mean, you know, in terms of the RV versus boat dynamic, I think if you, you know, one company I looked at Patrick Industries, they make component systems for both RV and marine and manufactured housing. And if you just hear about how they talk about the marine business versus the RV business, business, they definitely see a certain level of tightness and structural, you know, demand that, you know, is going to be, you know, that will evolve over the next few years that really is embedded given the limited supply. So, you know, you pick a, you know, a dispassionate producer that honestly focuses more on the RV space and they're a lot more excited about the multi-year tailwinds in Marine. And yeah, as you said, Brunswick, you know, if they were. only a boat manufacturer. I don't think I'd be as interested in them, frankly. I think it's the engine business, and I think it's really the parts and accessories business that really kind of gets me excited in terms of this business being able to generate cash throughout the cycle and be a lot more durable than just simply an boat OAM. And we're going to get to the recurring

revenue a second. We'll probably start touching on it now, but I just want to keep with the recession risk. So, you know, they said, hey, this year we're going to do about $10 in earnings per share, 2025. Their goal is about 17, I think it is. And they also in their deck, people can go look. It's a March 2022 investor day. They said, hey, we know all of you are concerned with recession. We know all of you are concerned with pullback. And they give, I'm looking at the slide right now. People can look at my notes. They give it like, hey, if you think the boat market comes down 30 percent, parts and autos comes down, parts of replacements come down 15 percent. Our earnings per share, instead of being $10 this year, it'll be eight. If you run an even more severe recession, they say our earnings per share will be

six instead of 10, right? And none of those, like a $72 stock with $6 recession multiples, like even that doesn't sound expensive, right? I'd probably buy a $72 stock with $6 EPS if that was mid-cycle, not trow. So the question is, do you believe that? Because clearly, I think the market doesn't base on the current price. And I don't know, it does strike me as a little bit, a little bit too bullish to say, hey, we're going to hit a recession as a boat manufacturer and our earnings are only going to go down from 10 to 6. And, you know, one backup I posted this as well was you go back, you only have to go back to 2018. And this is just the boat segment. But in 2018, the boat segment was burning money on an EBIT basis on 1.5 billion of sales.

2021, 1.7 billion of sales. They make 150 million in operating profit. But, you know, it does make me wonder, hey, are these guys being a little too bullish on their margins, on their recession forecasts? Are we going to get hit harder because, yeah, I don't know. You know, look, I hear you on the skepticism. Management can put out a lot of numbers. I will say that I do think they provided some transparency into their model, and I think some of that made sense. I think for me, the easiest thing to do was to look at 2001 and look at sort of the performance of boat and look at the performance of marine engine. They didn't split out P&A and engine at the time, but you can kind of get a sense for the the downtraft and

revenue. And I assumed it in a recession scenario that there is no replenishment of dealer inventories. The dealers are like, screw it, we don't want to replenish. We'll just wait for consumer demand to strengthen. And, you know, assuming incremental margins in sort of the mid-20 range, mid-20s to upper 20s. I, for my analysis, got an EPS number around 750 or 770, I believe, and I got them doing roughly $7.00 of free cash, and that's because currently they're spending a bit more than 5.5% in CAPX, whereas really they would normally spend closer to four, and because there's been such a ramp in inventory spend, just given the supply chain challenges and just

the need for boats out there. And I think that would normalize a bit too. So look, I think the market is saying prove it to me, which is a little bit of an annoying situation. I think if Brunswick can kind of prove that they're continuing to grow and continuing to see some of the tailwinds in the coming quarters, I think that will assuage some investors. But yeah, there is that sense that maybe there needs to be a little bit of a downturn and seeing some resilience before really they get that credit. So as you said, it may turn into becoming a little bit of a longer term investment, but I do think there is some credibility that the lows are higher and the highs are higher. And I think a big piece of that, and we've alluded to it, but I don't

think you've explained is their P&A business. And they say, hey, right now, about 37% of our revenue and 42% of our earnings because the revenue piece of this is a little higher margin is recurring revenues. And they say by 2025, it's going to be over 50% of our revenues are recurring revenues. And when I think boat manufacturer, I don't typically think 50% of earnings from recurring revenue. So can you go into the P&A piece? And there are a couple other different segments. But can you go into why so much of their revenues are recurring revenues and why these are sticky? Sure. So as you said, the P&A kind of parts and accessories really anchors that recurring revenue. They describe that business as being.

25% OEM, which means they sell systems into new boats, including their own. And then there's 75% is aftermarket. And I think one of the quotes you shared, and certainly the one of the quotes I shared in the substack write-up is that they indicated a vast majority of those aftermarket components are consumables. So really, you know, the largest aftermarket piece is engine components and replacements. It could be lubricants. It can be other components. that need to be replaced within a short time span on their engines. And as I understand it, 60% of their engine components

are proprietary to Brunswick or Mercury. So really, you have to buy their own components for that. But that segment has grown a lot over the years. It used to be just thought of as being a propulsion sort of replacement part, a distributor and manufacturer. And over the years, they've done a number of deals where they've now gotten into electrical systems. So now they're even inventing batteries

that can replace sort of engines to help power the electronics on board. They do things like wiring and circuit boards. They do controls. So they give you this little joystick now that can help you control a boat in very tight areas or if you're trying to dock the boat. And more recently, as you noted,

they did the deal in the Navico deal where they got into electronic systems, which is some really interesting technology, but really in the sonar, radar, and mapping areas. So I think that parts and accessories business is now run rate 2.5 billion, those 20% margins. Embedded in that is a $600 million distribution business, which touches 27,000 outlets.

But frankly, if that distribution business weren't part of parts and accessories, the EBITDA margins would be even higher. just to so seven they say 75% of the parts and accessory business is recurring and you know look at I do work for these pod for these podcasts but nowhere close as much as work as you but you know it does strike they just bought navico which is a billion dollar plus business which is a lot if I remember correctly a lot of navigation systems and stuff yeah and that doesn't strike me as like a recurring business right because you're only going to get a navigation as an it's very discretionary it's either an upgrade or you buy a boat that has a Navajo. So, like, how are they getting to 75% of the parts and accessory business is, is recurring when I just listed the biggest acquisition. I think the company's ever done, billion dollars. This is a $7 billion EV company, a billion dollars. And I don't think any of that is really recurring in there. I think the Navico business, I do think it splits 60% aftermarket, 40% OEM. So it does have more of an OEM system tilt. I think,

really the engine components, that's really a very consumable business. I think the electrical systems, again, some of those components are sort of must have or must need to run boats and those break down. No, I think it's a fair point. I don't have a great answer for Navico. I think there are probably some sales, some software components to it that need to be had on a recurring basis. But I think a lot of people, they look at some of these systems and their diehard fishing or angling people and they really want these things in their boats. But I think it's, I don't necessarily have that transparency as to why, you know, the 75% aftermarket business is highly recurring. It makes sense. And Navico, so with the, the, they do a lot of navigation system

and stuff. And, you know, navigation systems can be subscription, right? They can be the old Tom, Tom, PPS or whatever it is. Are they getting subscription revenue on the Rove? The Navico business, or is it all up front you buy the Navco system and you've got it for the life of the boat? They haven't really disclosed that level of detail. They did describe the acquisition as being very software oriented. Yeah. So I do think there is some tail to it, but they haven't broken out any sort of software recurring revenue. I read the acquisition call and I think they mentioned hundreds of software engineers coming over this part of the acquisition. And I was kind of like, oh, like, I don't even think of four software engineers as part of a boat business. So that was

kind of surprising. Let's stick with the Navico acquisition, right? So this happens in the back half of 2021. It's a little over $1 billion for the Navico acquisition. And it looks like a great business, right? As you said, there's software components. They're partnering with OEMs, which I'm sure boats aren't quite cars in this aspect. But when you partner with an OEM, like, these guys are planning their boats out years and years in advance. And it's like, it's actually very sticky being inside of that, especially with something so critical as navigation. So I'm sure it's like a very sticky business, pretty good visibility as long as boats don't fall. But in 2021, they paid 12x adjusted EBITA and that's quote, net of tax

attributes. So ignoring the tax attributes probably a little higher. And even at the time, you could see analysts coming on saying like, hey, this is a really good business. But 12x is a, a pretty big multiple. Like, how do you guys think about paying that when, you know, in your write-up, I think you had the P&A business at eight to nine times EBITO, if I'm remembering correctly. So if that multiple holds, that's where Navico is, they burnt 3X EBITA on Navico, right? Like, that's a pretty big. So how do you think about the Navico acquisition?

It's a great question. I think it's interesting. If you look at some of the Brunswick presentations prior to Navico, the electronic systems was not an area that Brunswick was previously in. And they listed Navico as one of the premier producers of electronic systems. And if you kind of look at the market size and what Navico does, they're unequivocally the market leader in that space. And certainly a lot of Brunswick boats prior to the acquisition were using some of their components already. So I think it is a huge brand name. I do think a lot of people when they invest in a boat,

whether it be fishing or, you know, a higher-end boat, they're going to want this kind of components. They're going to want the best. And these guys just have a dominant market position. In terms of what they paid for, yeah, it is a healthy multiple. I think, you know, that business when they acquired it, they said it was growing, you know, mid-teens, you know, and then if you look at the Q4 call, they say that Navico kind of nicely beat their, you know, what they underwrote the business for doing. So you got to think about it, mid to hide teens growing P&A business with an opportunity to improve margins, you know, throwing it into a much larger organization, being able to cut GNA, being able to cross-sell it more effectively. You know, I think there is some merit there

to paying a decent multiple. It was a private equity owned asset. So there are probably a lot of things they can do with it. You know, some businesses, some companies, a lot of Danaher companies, for instance, don't always look at acquisition multiples. They look at sort of the return on invest the capital and compare that to their weighted average cost to capital. And if they can see sort of a break even within a short period of time, they feel good about it. So I think it's a strategic asset. I think it does enable them to really have a lot more the boat in terms of the accessories and the parts per boat. And I think that really makes it increasingly easier for them to go to market and get on OEMs to really provide a whole suite of mechanics and electronic

systems, et cetera. Yeah, no, look, I'm looking at the quote right now, which you reference, where they say, hey, Navico beats the model that we had. You know, they did 35% revenue growth in 2021, bottom line earnings more than double. We expect them to, we expect that trend to continue. They're beating our things. But at the same time, you know, like Brunswick stock is about a hundred when they do the acquisition in 2021. Their stock is 75 today. It's not because this was a bad acquisition, but I do look and I say, oh, you pay 12 times EBIT off. People were wondering about the multiple at the time. And now your stock's down 25 percent. It's like, oh, the multiple looks even a little more aggressive at this time. So I'm just of two minds about it, you know?

No, I think it's fair. I think generally in the P&A space, when you have a foothold in an area, it's easier to consolidate smaller players at much more reasonable multiples. So I do think they wanted sort of a, I call it a bayhead or whatever. They wanted some anchor piece in that segment to really help them continue to be able to expand by rolling up the smaller players that they acquire much more attractive multiples. Let me switch a little bit, and this does relate to acquisitions. One of the things that they say, and I think one of the core pieces that you mentioned in your model that you like is they say, hey, we are vertically integrated, right?

So we don't just make the boat, make the engine, we make all the afterparts for the engine. So when we sell a boat, we're getting the boat, we're getting the margin on the engine. We're getting all the lifetime value of the engine, parts and replacements. You know, we're installing, now we're installing the Navico system, so we'll get all the value for the upgrade. And I'm a little bit of two minds about that, right? Like, I 100% get. You can, you can raise a razor blade in it, right? Like all the aircraft engine manufacturers, they sell the engines at a loss, so they get that lifetime maintenance contract, right? So, I definitely can't understand that. At the same time, when I think boat, I kind of go and I think,

oh, well, car manufacturers, car manufacturers don't do this, right? Like, they basically break it up and they make the car, but they buy a lot of the engine technology for, from one company. They'll buy the seats from someone else. They don't own the retail side. They have a auto dealership. And it'd be weird if you heard a car company go and be like, hey, we're capturing triple margins because we're making our car seats. We're putting them into the car. We're selling the cars their own dealer. So like, I'm of two minds about it. And I just want to talk to it over to you. Why is vertical integration here? Why is that the right answer? And, you know, their peers could copy this if they wanted to. And it doesn't appear that they've copied it. So like,

why is this an edge for them? Why is this the right strategy? It's a great question. I think some of it just has happened over time in terms of they've acquired boat brands and they acquired mercury. And then over time, they've acquired T&A businesses. Look, you know, in terms of boats versus cars, it's a very interesting thought in terms of comparing why one would be vertically integrated versus the other. Look, if nine out of ten boats today are outboard and sold and there's basically a duopoly in terms of engines. I think you'd rather be on the side of owning a business that does produce the engines. You know, if it's, you know, they're going to own 50% in the U.S. market. I think from a dealing with inflation perspective,

dealing with supply restrictions, I mean, Yamaha had some issues last year in terms of getting some supplies here. Certainly the shutdown in China doesn't help a lot of the, uh, and engine manufacturers, Brunswick manufacturers, a lot of their higher horsepower engines really in Wisconsin. So look, I think in a supply, in a challenging supply chain market, compounded with higher inflation, I think being vertically integrated has enabled them to really expand margins. And look, why can't other manufacturers do that? Well, I mean, the engine business has been around for such a long time, you know, they say 10 million boats out there, 50% of the engine happened to be mercury. You know, it would take billions of dollars and a lot of brand name recognition

to really get into the outport engine market and even make a relative dent. I mean, frankly, it's been going the opposite way where BRP and 7 Marine actually exited the marine engine market. So, you know, the boat market is not, you know, it's $9 billion market in the U.S. You know, in terms of being vertically integrated, I just, I think it really helps them manage the supply chain a lot more effectively. And I think their peers simply, you know, look, Malibu is vertically integrated. They actually have higher margins than Brunswick. And that's really a function of the fact that they make a premium boat and they charge a premium price, which allows them to capture more margins, but a lot of bolt builders are pretty fragmented.

And so they don't have the scale to even consider being vertically integrated. Let me shift to something a little more fun to think about. They've got a boat club, Freedom Boat Club, I think it's called, which basically like, look, it makes sense to me. I know several people who have a boat and they go out and spend $50,000 on boat, let's say, right? And it's like, okay, cool. I think the average boat gets used like 20 times per year, 30 times for year. I don't know. So like you think about that appreciation on that boat and then you've got the maintenance

cost of the headaches. Like that's a, I get people love boats, right? But that's a pretty big investment. Whereas with the Freedom Boat Club, I could imagine like a net jets, right? Like, yes, you could go buy a private jet, but it's probably just better to have a net jets and let them worry about the maintenance and like just pay per use. So I have said a lot. We haven't even said what Freedom Boat Club is.

I want to turn it over to you. what is Freedom Boat Club? And, you know, is it just a silly little thing? Or do you think there's real potential to form like a NetJep's type membership that's worth a ton of money there? Great question. I think when I talk about it in the write-up and we think about it in general, it's maybe three to four percent of boat revenues. So it's too small, really, to be a business to really talk about it's having a material financial impact today. But the Freedom Boat Club, I think, is a very, very interesting business. I think it, you know, there's an upfront fee that's somewhere between $3,000 and then

people pay $300 to $400 a month to basically have access to boats that are between the ages of zero and four years. So they get access to fresh boats. They get access to people to help train them and how to use the boat. From a financial perspective, 75% of the revenues associated with it are recurring or subscription base. And basically, their company-owned boat-as-a-service operations and then their franchise operations. So franchise, they own a 6% royalty fee. And then if they own and operate it, they get all the money from that. And the margins there are typically in the mid-20s.

So as you said, I mean, it's almost, I kind of thought of it as sort of like a timeshare situation versus a vacation home. I think it taps into a different demographic that just, either doesn't have the means of buying a boat or doesn't want the hassle of buying and maintaining a boat. I think they bought their initial footholes for about eight times EBITDA. And, you know, now they have 350 locations. They have over 550,000 members. And it's interesting, not all the boats right now are Brunswick boats, that in time, every boat that will be in these boat share clubs or shared access clubs rather will be Brunswick boats and structurally as

you know currently that number is 4,000 but it will go to 5,000, 6,000 suddenly you think about that as having a three year life and then you start getting a meaningful replacement number that goes strictly to Brunswick boats. So it is a very interesting area and in addition when boats come off sort of their useful life for the boat club, they will get sold through their bout teca, if I'm pronouncing that correctly, their used boat sort of dealer. And mind you, you know, if 200,000 boats get sold brand new, 800,000 get sold used. So it's a really big market out there and being able to offer some sort of warranty and being a huge boat manufacturer yourself, I think that gives you a competitive edge in terms of being a used, uh, used,

boat, you know, a credible used boat dealer. Yeah, it just seems to me, I get it small, but that seems to me the type of thing you can get a network effect. And, you know, one of the old Carvana arguments was people buy a used car every seven years, but part of that is because the process sucks. And what if the used car market, you can expand it to people buy used cars every five years just because you make the process a little better, you take some of the friction out of it? And, you know, as they say in their slides, they're like, there are 140 million people who go boating. There's only 10 million boats out there. I bet there is room for a lot more people who, if you could get a good membership that said, hey, choose your weekend when you're free.

You can go once per month or something. Now, $10,000 up front probably is going to be a gating factor. But you could imagine different models where this could really take off and you could have a really big network effect, right? That's the great thing about NetJex. You're not going to start up a private jet membership competitor because you really need to have coverage everywhere. And this would be a little more local. but I can just see a lot of potential for that. Subscription business, it lets them push their boats. It gives them inventory for the used car, for the used boats. It gives them relationships with people who like boating because they join the membership.

Like I can just see a lot of potential there, but probably just a call option. Let me turn to question I love to ask everyone is, if this company is so cheap, why aren't they buying back shares? And I don't have to ask that here, right? Like they came out and said, and there's some great quotes. I've encouraged people to go read the Q1 earnings call or release. they say, hey, we bought back, I think it's $80 million in Q1. We're going to buy that $80 million in Q2. We think we're undervalued.

We're going to do $300 million this year. And if our stocks stays here, we're probably going to do more than $300 million. I'm probably going to keep leaning into it. Great. Love it. We don't have to talk about repurchases. So I have to ask you a different question. Insider ownership here sucks.

I don't think there's ever been insider buying. The CEO owns an okay amount of stock, but you know, he's been here three years. It's not huge. There are several directors who I looked it up. They get more paid more. every quarter in board fees than their total stock ownership. So I'll switch it and ask the insiders can see value here, right? They want to buy back shares. They're talking about it all the time. Why don't we see insider buying? Why don't we have some insider ownership here?

It's a phenomenal question. I won't lie. I spoke with management quite recently, and that was one of the main questions I asked them. I will note that there has been some turnover in the board. So, you know, in terms of heading their requirements for board ownership, I think that that that will take some time. I got to get the headline number. That gets people excited. I do get there's complexities to it. But even if you adjust for that,

I would say insider ownership is pretty low. Yeah. I think the CEO owns close to 80,000 shares, you know, $6.5 million, you know, relative to what he gets paid, I'm sure, you know, it's not a tremendous number.

The CFO is relatively new. He was formerly the head of IR. You know, I think if the stock hangs to where it is, actually do you think we'll potentially see some insider buying? I do you think that they remain very convicted that this business is firing on all cylinders and demand is really there and sort of they're pretty baffled by where the stock's moving. I mean, I just want to touch on the buyback because even though you highlighted it,

I think, look, management's not in the business of valuing their business per se. I mean, that's really our jobs. but they know what acquisitions are out there. This is not a highly levered company. I'm sure they're probably been people who talk about them about what their business could be worth in general. And I think they have a better insight into their future prospects, certainly in the near term.

And so they have a good pulse there. And so when I look at buyback, I never like to hear that, oh, it's accretive. That's why we're doing it. I like to hear management teams that really articulate why they think a buyback makes sense in the context of where the stock is trading. Sometimes you'll find promotional management teams,

but sometimes you also find management teams that are thoughtful and understanding what they need to show about the business to help create shareholder value. So I found the quotes to be helpful. To your point, look, this business should do $350 million of free cash this year. I think that's a reasonable cap

to what they can do in buyback, but they can certainly front-load those buybacks if they think the stock is really depressed here. and so we could see them be on a run rate number that, well, it sees that $350, really because they want to front load and be involved today. So I think insider ownership, like you said, it's like 80 basis points. It's not great. And we definitely like to see them be more active there. Another write-up I did on Vantier, there was that combination of insider buying and the move for share buybacks.

And so I think when you see that double signal, it's a little more appealing, but I would just say stay tuned. We're going to talk about Vantz here for a quick hot second at the end, but I'll save that for the end of the podcast. I've got two small questions outstanding, but before I get to those, why don't I just ask? We have covered a lot here, right? I think we've done a nice job covering everything. I do have two more small questions, but I'll pause here and ask, anything you think we should have covered that we didn't cover or anything you think we kind of gloss over that you wish we had covered a little. harder? Look, I do think the free cash component of this business has been inconsistent over the years. They had to get rid of a pension plan that was really dragging on free cash back

in 2019. Look, I think there's been a real transformation here. I think it's been slow moving in some respects, but I do think the business is highly focused today. A lot of fixed costs have been removed. I kind of mentioned in the write-up that today's profitability, is on a much lower base of revenue, which suggests the fixed cost structure, particularly for boats, is much better. Look, I think the engine story is a phenomenally interesting story. If you look at one of the charts, they're one of the only manufacturers that really makes these 300 and above horsepower engines. You can do some YouTube searching, and you'll see the 600 horsepower engines, an absolute beast. And it's really, they have 70 foot boats that are frankly taking these outboard engines.

they will take three or four or five or six of them. And those boats historically have never even been able to use outboard engines. And the beauty of an outboard engine, it's easier to maintain, it's quieter. They can be more fuel efficient. They can be a little more eco-friendly if they're not using diesel, like inboard engines. So I think the engine component is a really interesting part where it's a real land grab right now. And yeah, I think those were really maybe the two other points that I I would focus on. So again, free cash, improved cross structure, and then really the opportunity

with an engine to potentially outdo their growth targets. Now, you mentioned the $17 in EPS. That's not something that anyone can really bridge to. I think it's because they envision themselves doing some larger P&A deals in the out years. I think that they can get to $14 a share in EPS in 24, which, look, if things slow down, that number probably slips a little bit. But I do have conviction that today's sort of 350 free cash number can easily be double that number, even in a scenario which there's a little bit of a slowdown. You know, I said I had two questions, but I'm going to change it to three. And by the way, I agree with you on the fixed cost. I just encourage anyone, go read the March investor, the March investor day. And they do a really

nice job talking about how they've changed the fixed costs over the business, the variable cost. us. And believe it or not, but I thought they did a nice job highlighting that. So I just wanted to point that up. Three questions left. First, hate to go back to the bullwhip effect and everything. But one of the things that I worry about here, which I don't think we fully address was we did address the demand side of it. But I do worry, they've got a million square feet of capacity coming online at the end of this year. And obviously, they think they can fill that. And I, again, I come back to the RVs and I just get worried, hey, in this case, it's not just that maybe your demands you high, the capacity, you're bringing all that capacity online. So how do you get comfortable

that they're not kind of over investing in capacity here? Right. So I like to think of the capacity expansion really for boats is going from 40,000 to 50,000. It's not going to happen overnight. It's going to be staged. And frankly, it's going to, what they're doing is they're expanding their low-cost facilities. They're not greenfielding it. Like as you mentioned, Peloton is. And maybe we'll Peloton didn't just Greenfield. Peloton went and spent several hundred million dollars to buy as suppliers. So they greenfield and they bought suppliers. Yeah, yeah, really pretty crazy. Look, I think there's definitely, you know, you highlighted a quote about Boston Whaler. That's a saltwater fishing brand, pretty iconic brand. I think they're being very surgical in terms of where they want to expand capacity. And if demand is, there, they're not going to go from 40 to 50. This is really thinking about it really in bite-sized increments. I do agree that if you look at where the inventories are today, it's a good story

if they produce closer to 40 to 42,000. If you immediately start thinking they're going to produce 50,000, then there's definitely some questions as to whether demand will be there. So I think it's a very fair question. I just think that they're going to be, they're not going to just do a step function in terms of growing capacity, I think they're going to do it kind of very surgically. And even the capacity number, I mean, this past year, I think they've produced or sold somewhere closer to 38,000 votes. So there's the name plate, and then there's what they actually are able to do. And so there's going to be a delta there too.

Perfect. All right. Second question. This is a smaller one, but I was a little surprised. They said, hey, I think the average bro, it's 78% of votes sell for less than $50,000 headline price. And somebody asks, hey, inflation's rising. Maybe consumers are weakening, interest rates are rising. How does that impact your buyers? And they said, actually, only about 50% of boats that we see are bought on credit. And that number kind of surprised me. You know,

like I don't know the number for cars, but I would be cars are a lower tick than boats in general. And I would be shot if only 50% of cars are bought on credit. So how do you think about credit cycle, credit, that 50% number they threw out there? Yeah, it's a good number. If I had to pull something out of a hat, I don't know if I necessarily would have pulled that 50,000, that 50% number. From what I understand, Bose typically a consumer will put down 10 to 20% as a down payment and then enter into a 10 to 15 year loan. You know, if you just assume that it's a loan that amortizes over time, sort of flat payments, and you kind of stress interest rates up or down 100 basis points, or in our case up 100 basis points. It really only adds up to around

$15 to $25 a month. You know, the complexities of consumer behavior in terms of people at that income level, it's not easy to really ascertain. As you said, these are aluminum boats. You know, they sell a ton of aluminum boats that are fishing boats where the highest value component on them is an engine. And that's far and away. So it's a, it's a reasonable question in terms of thinking about why is 50% the right number and what higher rates mean. I think it's, I think it's really TBD in terms of really seeing the performance there. Yeah, it's just tough to know, but the 50% number it gave me, I was pleasantly surprised by it. And as you said, like, people are really concerned about it, but it doesn't seem like interest tax on that much to it. And the consumer, go look at

the JP Morgan Conference, the JP Morgan Investor Day from a couple days ago. Like, consumers still seem strong. There's still lots of jobs out there. So who knows, right? This is a forward-looking business. And I do get kind of caught up and, hey, we're talking about what the consumer is going to do today in a month or now. And like, what really matters is 2025 or like a few years up. Did you want to say something there? Go ahead. Yeah, I will say, and I think management made this comments. I'm not going to say it's wholly original, but, you know, when you're buying a sub-50,000 boat, you know, it really depends on your employment. It depends maybe on the equity in your house. Those things are still very strong. It doesn't depend on how much Tesla stock you own and

whether it's up or down 40%. So these guys aren't selling mega yachts. I mean, they kind of got out of the yacht business, really because they weren't even manufacturing the engines for those businesses. They were low margin, low synergy businesses. So I think some of the factors that you know, your typical stock investor would think about like, hey, would I want to make this massive discretionary purchase? I think that calculus is a little lower for the cohort of people that buy a lot of these aluminum fishing boats. If fishing is your hobby and you love fishing, right? Like everybody's got their hobbies. If that's your hobby, like what might look like a silly purchase to you or me.

You know, I've got friends who all their truck is their baby, right? And if you're fishing's your hobby, your boat might be your baby. And you and I might look and be like, you spent $40,000 on a boat. That's the stupidest thing I've ever heard. And they're like, that was my dream. I own my boat now. Like I go fishing when I want. So to each their own, right?

That's the beautiful thing about capitalism. Everybody can spend their money on what they want. It's got its faults, but that's one of the beautiful things about it. Last question, I think this relates to interest rates, but we might as well address it. Gas prices, right? A year ago, you could go fill up your boat for $2 a gallon. Now you go fill up your boat and you're going to get sick or shock. It's $450 a gallon. I think management has really addressed this in the calls and stuff. But I just, there are going to be some listeners who think about it. Gas up. That's bad for boats. That's bad for boat. Use a bad for goods. So I'll just toss it over to you. yeah look I think I think they quoted the average number of hours people use a boat as around 30 hours a week and I'm sure that depends on whether you live in the northern regions where there's a shorter boating season than in the south look boats have never been fuel efficient vehicles I mean I've seen boats really a good boat might do one mile per gallon is that is that really how Yeah, yeah. I mean, look, propelling a boat in water, the amount of friction and all that in terms of getting through water, it's just, it's so much different than driving through a road. And frankly, that's part of the reason why we haven't seen the electrification of boat engines. I mean, the sheer battery you would need would, like, way down the boat. You'd have to replace, you know, five people couldn't hang out on your boat party. Andrew, you would have to have a massive lithium ion battery sitting there. So I think boats aren't notoriously very fuel efficient.

I think if you've made the investment in a boat and you value the time out on the bay or in the sea or in the lake, you're kind of going to use it either way. You know, the management tried to quantify it and say, hey, look, if gas is here, you're really only seeing an increase that's not too much relative to maybe what your gas consumption is for a car. I just think, you know, you're not using it every day and you really value the time out, out in the sea or out in the water. It's going to be a pinch, but it's probably not going to be a deal breaker as far as how much you use the boat. Perfect. Great.

Hey, I have two unrelated BC questions, but I always want to give you the last thing. Again, anything you think we should have hit, anything we didn't hit hard enough that you want to talk about BC? And the answer can be we did a pretty nice job. No, Andrew, I think you asked a lot of good questions and I always love these conversations because it forces you to really understand the story and frankly, it gives me things to really want to dig through and go back and look at. So, you know, learning about a company is an iterative process and being able to talk

to someone smart about a company and you've done your homework. It's really, it's really helpful and nice to do. People ask why I do the podcast and that's the reason, right? PJ's done a month's work of work on BC and I got to do a morning's work of work and then ask them all my questions on it. Now I've got a super interesting company trading at seven times EPS that I can, you know, I've got a lot more work to do on it, but now I'm a lot smarter on it. Two unrelated questions.

Number one, Vantir, VNT. That was your first write up. BC was your second write up. You wrote a vonsier last month. I pulled up the chart. It's up five percent since you wrote it up. and the Russell is down almost 9%. So there we go.

There's some good alpha. But they also announced a, they reloaded their share repurchase this morning. Bled naked reloaded this morning. Thank you to them for doing it in front of the podcast. But just wanted to get your quick thoughts, VNT. You still like it here, I'm guessing. Everything's progressing with the repurchase and everything. Yeah.

Look, I think Von Tier is another one of those underrated businesses. I think the sell-off in the stock, I think is a highlight in the right up was really a quarterly earnings, projecting into 2023, this EMV, this EuroPay MasterCard Visa, the tail of that in terms of there was a regulatory requirement to have your outdoor POS systems be able to accept the chip to prevent skimming fraud. And there was always sort of a peak to trial for $400 to $500 million revenue decline, but they didn't quite articulate the timeframe. I think two things have been really interesting in terms of, well, Three things, frankly, that have played out that I saw from the last earnings call.

And that's, A, the continued growth of their car wash technology business. And actually a number of companies out there, driven brands. I don't know if there's like a Mr. Car Wash or something, a Leonard Greenback carwash business. I mean, it's just really car washes are growing gangbusters. And they're a nice ancillary business for C stores. So that's nice to see it that area is growing and their technology, you know, know, the acquisition they made while expensive is really helping push the top line of their mobility technology business. Secondly, I hinted in the write-up that they could divest some non-core

assets, whether it be their telematics business or their smart city business, which is kind of an interesting business. They can control traffic lights to help EMS vehicles move through the city quickly. And then they really have a auto aftermarket, whether it be a diagnostics or wheel servicing business. And I think all those businesses can frankly be on the block. And they indicated clearly that they are marketing some businesses to be sold to raise capital. You know, historically, Danaher businesses grow through acquisition. So seeing that initial share repo, they announced it in last May of 21, but they didn't act on it until very recently. And there were some very bullish quotes around that. And they spent 257 million.

out of the $500 million, and they seem inclined to buy more. And so when I see that they've kind of reloaded that authorization, I think that that confirms that they still see a lot of value here. And so, yeah, it's a defensive business, and I've been happy so far with how it's performed, but I definitely see some of the actions they're taking as really putting the business in a better position to succeed going forward. and the multiple discount, the free cashful yield discount,

I think those have to still bridge over time. Perfect, perfect. And then the second question I was going to ask. So you've got volunteer, you've got BC. I think you put up BC next week. It looks like you're trying to do maybe one a month. Is that the target? But when's the next one going to come out?

Great question. That's funny. I was looking at, was it franchise group? I was looking at that independently. And then I remember you kind of posted some interesting from the earnings call, you posted an interesting quote. Look, I think finding a business where you think you have some edge or you can add some value to the discussion isn't easy. So I do spend quite a bit of time trying to isolate a business I find interesting. A month has kind of

been the cadence. And I think a month is kind of reasonable. I think, you know, I haven't been in the stock pitching game for a little while. So kind of getting my fee legs and getting back into it. So hopefully maybe that cadence can speed up a little bit, but, you know, the goal is to put something that's thoughtful and hopefully well written and at least get people, get it on their radar. You may not like what I have to say. You may have questions where you think buying a consumer discretionary stock is stupid now, but at least they'll be on your radar and you'll, you'll be a little more, you'll be a little sharper on it. It's funny you say buying a consumer discretionary stock is stupid. I've been massively bullish retail and somebody talks to me the other day

And they're like, it's one of the most contrarian trades I've ever seen because everybody just hates retail. And, you know, last week when retail would go down 10% every day, I was like, oh, gosh, I can see why. And then this week, when it goes up 10% every day, you're like, oh, I'm a freaking genius. But no, I hear you. Look, you said you try to do thoughtful write-ups for everyone. And I've talked to for a long time. I've read your first two write-ups. I know that's going to be the case. So everyone can go follow. I'll include a link. I'll include a link. It's P.J. Smith, investment ideas. It's under his full name. But there'll be a link in the show notes. So just click. on it, go subscribe. The first two write-ups are up there and they're free. So go check it out. And PJ, looking forward to seeing the third write-up, looking forward to having you on and getting the podcast in the future. Well, thank you so much, Andrew. Some great questions. And I've heard some of the other podcasts, you know, really thoughtful people. So it's a privilege to be on. Hey, thanks again for coming on.