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

Good morning and thank you for joining us. With me on the call this morning are Dave Foulkes, Brunswick’s CEO; and Ryan Gwillim, CFO. Before we begin with our prepared remarks, I would like to remind everyone that during this call, our comments will include certain forward-looking statements about future results. Please keep in mind that our actual results could differ materially from these expectations. For details on these factors to consider, please refer to our recent SEC filings and today’s press release. All of these documents are available on our website at brunswick.com. During our presentation, we will be referring to certain non-GAAP financial information. Reconciliations of GAAP to non-GAAP financial measures are provided in the appendix to this presentation and the reconciliation sections of the unaudited consolidated financial statements accompanying today’s results. I will now turn the call over to Dave.

Thanks, Neha, and good morning, everyone. Brunswick delivered another successful year in which we achieved the second highest sales and adjusted earnings per share in company history, despite market headwinds. We also continued to gain market share, increase our operational efficiency, launch exceptional new products, actively control costs, and progress our strategic initiatives, including our ACES strategy. Our full year net sales of $6.4 billion and adjusted earnings per share of $8.80 were slightly below our guidance range as wholesale customer ordering patterns softened late in the year. However, our diligent focus on cash generation resulted in outstanding free cash flow of $473 million and full year free cash flow conversion of 76%. In addition, we executed $275 million of share repurchases. Mercury Marine has continued to capture solid market share, with full year U.S. outboard retail share up 50 basis points versus prior year. 2023 U.S. new boat market unit retail sales are anticipated to finish in line with our estimates of down mid-to-high single digits with Brunswick brands outperforming the market in many segments. As we moved out of the core 2023 retail selling season, we worked closely with our marine channel partners to actively manage boat field inventory levels. We closed the year with 36.7 weeks on hand in the U.S., which is in line with our target and with historical norms. I will now turn to some of the segment highlights for the quarter and full year. Our Propulsion business finished its second best year on record, leveraging more exciting new products, market share gains, and operational efficiencies to deliver consistent year-over-year operating margins, despite slightly lower sales and earnings versus the historical highs in 2022. For the full year, Mercury gained 150 basis points of overall U.S. retail share for outboard engines over 30 horsepower, which accounts for the majority of Mercury’s investment in recent years. In addition, over 5,000 Avator electric outboards were produced following the launch of the first model in early 2023. Mercury saw slowing of OEM off-season orders as the OEMs scaled back boat production to control field inventory going into the new year. We expect OEMs to remain cautious entering the first quarter of 2024 as they assess consumer sentiment at early-season boat shows and monitor the macro environment. Our Engine Parts and Accessories business demonstrated steady performance in the quarter, reflecting a continued improving sequential trend. Sales in the Products portion of the business were up versus prior year for the second consecutive quarter and our Distribution business was only down slightly, with sequential improvement from the previous quarter. Overall segment sales were up 22% on a full year basis versus 2019. Navico Group had a solid finish to the year, as an increased flow of new products and continued focus on cost control, business integration, and complexity reduction helped offset a softer marine OEM market in the quarter and the considerably slower RV manufacturing environment. Finally, our boat business delivered sales and earnings in the quarter consistent with expectations, while continuing to ensure healthy pipeline inventory levels entering 2024. Strong demand for premium products, together with market share gains in many categories, is helping to provide a stable baseline for 2024. Freedom Boat Club continues to grow and now has more than 410 locations. Members completed approximately 600 thousand trips in 2023, demonstrating the productivity of the model. Shifting to external factors now, U.S. employment remains at healthy levels with inflation continuing to stabilize. The cadence of Fed and global central bank interest rate reductions will continue to be an important factor in the coming months. Overall boat retail sales are trending slightly above 2023, but unit sales in the month of January are always a small contribution to the year. Global early-season boat shows are generally encouraging, with good traffic, interested buyers, and healthy lead generation. Normalized inventory levels are allowing consumers to shop for the models of their choice and incentives continue to be important in stimulating interest and assisting dealers in closing sales. Our boat, engine, and technology brands continue to perform well, with Mercury recording outboard share gains at the important Dusseldorf boat show, achieving overall share of 48%. Dealers entered 2024 with healthy inventory and are cautious in their ordering entering the new year as they closely monitor boat shows and retail at the start of the season, as well as the economic trajectory. We are pleased with interest in the recently launched Brunswick Retail Finance program with more than 25% of Brunswick boat dealers having already enrolled. The program provides an additional way to stimulate demand and convert leads, with an efficient online consumer finance approval process and the ability to introduce promotional financing. In addition, our investments in digital platforms continue to drive benefits across our brands with more than a third of Boat Group’s sales digitally assisted in 2023. As expected, boat OEMs are carefully controlling boat production rates to align with anticipated retail in 2024, resulting in lower order rates for Mercury engines and Navico Group OEM products. The softness continues to be more prevalent in value products and low-to-mid horsepower outboard engines, with premium product production and demand remaining more solid. Shifting now to a global view of revenue in the quarter, overall, we saw a 15% sales decline on a constant currency basis, excluding acquisitions. On a full year basis, the U.S. market declined mid-single digits versus 2022, roughly in line with Europe and Asia-Pacific. U.S. new boat industry retail was slightly down in the fourth quarter versus 2022, with preliminary full year retail in line with expectations of down approximately 6% versus 2022. Overall, for the full year, Brunswick performed slightly better than the industry, picking up share particularly through strong performance by our pontoon, premium fiberglass, and tow brands, supported by planned promotions and marketing on select product lines. Outboard engine industry retail units turned positive this period with the fourth quarter up 1% versus prior year, bringing full year unit retail to down 2%. Mercury continues to outperform the industry with fourth quarter share gains of 50 basis points in greater than 30 horsepower categories. As we actively manage boat pipelines, we ended with inventory in line with expectations and historical norms with U.S. weeks on hand at 36.7 weeks and 14,000 units versus 16,000 units in 2019. International boat pipelines are slightly higher, which is normally the case. I will now turn the call over to Ryan to provide additional comments on our financial performance and outlook.

Thanks, Dave, and good morning, everyone. Brunswick delivered a solid fourth quarter despite softer wholesale demand across our businesses. When compared to an extremely strong fourth quarter of 2022, net sales in the quarter were down 14% and adjusted EPS of $1.45 decreased 27%. However, we delivered a record Q4 free cash flow of $242 million, a 25% increase over prior year, as we continue to focus the enterprise on generating cash and minimizing working capital usage. Sales were below prior year as the impact of cautious wholesale ordering patterns by dealers, OEMs, and retailers, coupled with higher discounts in select segments, was only partially offset by successful new product momentum, positive mix, and pricing implemented in previous quarters. Operating earnings and margin declined versus a record fourth quarter 2022 resulting from the impact of lower net sales and prudent spending on growth initiatives, partially offset by ongoing cost containment efforts. For the full year, we delivered the second highest sales and adjusted EPS in Brunswick’s history, just behind our 2022 performance. Our strong free cash flow of $473 million, resulting in second half free cash flow conversion of 143%, again reflecting our continued focus on driving cash in this challenging market. Now we’ll look at each reporting segment, starting with our Propulsion business. Revenue was down 12% versus the fourth quarter of 2022 primarily due to cautious OEM ordering patterns, partially offset by continued market share gains in outboard engines and the acquisition of Fliteboard completed earlier in the year. Operating margins increased by 110 basis points versus Q4 2022 as the impact of the sales declines and higher labor inflation costs were more than offset by cost control and reduced material inflation. As Dave mentioned earlier, as we exit 2023 and enter 2024, we anticipate that we will continue to maintain our progressive market share gains, but that our propulsion business will be impacted by additional reductions in boat OEM production levels that may not abate until the start of the primary retail selling season in 2024. This will enable us to sell more engines into the dealer channel, but the overall impact will still be a decrease in overall market demand for engines. The Engine Parts and Accessories business continued to improve sequentially throughout the year, with Q4 sales essentially flat versus 2022. The high margin Products business grew sales by 3% versus prior year, while Distribution sales were down 4%, as trends have continued to improve in both businesses from early 2023. Segment operating earnings and margins decreased in the quarter with the slight net sales decline and higher manufacturing costs more than offsetting the impact of pricing and lower operating expenses versus prior year. Navico Group reported a 17% decrease in sales as the business experienced softer marine OEM orders and the continued weak RV manufacturing environment in the quarter. Segment operating margins decreased in the quarter primarily as a result of the net sales declines, which more than offset the benefit of lower operating expenses. Despite an overall challenging 2023, Navico continues to make strides against its strategic priorities, including removing almost $20 million of structural cost while improving its product development process and continuing to invest in market-leading technologies and expand its customer base for integrated and connected solutions. Finally, our boat business delivered sales and earnings in the quarter consistent with expectations, while continuing to ensure healthy pipeline inventory levels as we enter 2024. Sales were down 22% versus Q4 2022, but sales in our more premium Saltwater Fish segment, which includes Boston Whaler, grew 5% year-over-year. Adjusted operating margins and earnings were down primarily due to the lower sales, partially offset by focused cost reduction activities. Freedom Boat Club, which is included in Business Acceleration, had another solid quarter, contributing approximately 8% of the boat segment’s revenue during the quarter while seeing very steady membership levels despite the macro-economic uncertainty. We successfully executed our capital strategy in 2023, ending the year with $480 million of cash while funding strategic growth in our businesses and returning capital to shareholders. We deployed $289 million for capital expenditures on exciting new products and growth projects across our businesses, which we believe will drive future revenue and earnings growth. In addition, as Dave mentioned, we took advantage of market and Brunswick share value dislocation, repurchasing $275 million of our shares, representing approximately 3.5 million shares or 5% of the company. We also increased our dividend for the 11th consecutive year. Finally, our investment grade credit rating remains strong, reflecting a healthy balance sheet and net leverage of 1.8 times. We will refinance our 2024 notes during the first half of this year, with our strong liquidity and cash flow generation capabilities continuing to provide investment and spending flexibility across the enterprise. 2024 has the potential to be a year of steadily easing financial conditions and while we enter the year with a cautious outlook, particularly on the first quarter, we remain extremely focused on driving earnings, while delivering steady free cash flow and resilient EPS, which we believe will result in continued strong shareholder returns. Our disciplined pipeline management, strong operational performance, and continued investments in new products and growth, coupled with prudent cost containment actions and a thoughtful capital strategy, provide the necessary controllable levers in this uncertain consumer and business environment. For fiscal 2024, we anticipate revenue of between $6 billion and $6.2 billion, adjusted operating margins of between 12% and 13%, and adjusted EPS in the range of $7 to $8. We continue to see positive free cash flow conversion and working capital trends, and anticipate generating more than $350 million of free cash flow for the year. Please see the appendix for additional guidance regarding anticipated segment metrics. We thought it would also be useful to provide a short walk from our 2023 adjusted EPS to our 2024 guidance, along with providing more insight on our planned 2024 OpEx. The main driver of the 2024 EPS reduction is the absence of pipeline fill across all our business units, as our channel inventory levels are fresh and at appropriate levels to start the season. A little more than half of the impact relates to our Propulsion business, as they continued to fill OEM and dealer pipelines well into 2023, with the remainder split evenly between our Boat Group and Navico. If retail demand exceeds our expectations, we anticipate that dealers and retailers will reorder product more consistent with historical patterns, which would provide a potential benefit later in 2024 or into 2025. We then have approximately $0.50 of impact from increased tariffs, interest expense, and a slightly higher tax rate. Although these three items are primarily uncontrollable, we will do our best to mitigate and minimize these expenses as we move throughout the year. Lastly, we will continue to take actions to right-size our enterprise cost structure. Although OpEx will increase slightly year-over-year, the increase is primarily related to the Fliteboard and Freedom Boat Club acquisitions from 2023, together with normal cost inflation and resetting variable compensation back to target levels. We are countering these items by planning to remove no less than $40 million of structural costs across the enterprise. Countering these headwinds are several tailwinds, mostly within our control. We anticipate continuing to take market share in outboard engines, especially in high horsepower categories, while also taking share in premium boat categories and certain marine electronic categories where new products will drive growth. We also plan to be aggressive with share repurchases, especially early in the year. I will wrap up the financial update by sharing some P&L, cash flow, and other capital strategy assumptions for the year. First, we expect a modest working capital usage for the year, reflecting our continued enterprise goal of lowering inventory levels to match anticipated sales while generating cash. Our slightly higher depreciation versus prior year reflects the additional capital invested in our businesses in recent years, with acquisition amortization, which we exclude from our adjusted results, being similar to prior year. It’s been a few years since we’ve had to discuss tariffs, but despite a favorable exemption extension into the spring, we anticipate paying $15 million more in tariffs versus 2023. These tariffs are primarily related to components sourced from China used in our primary outboard manufacturing facility in Fond du Lac, Wisconsin, along with the importation of 40 to 60 horsepower engines produced at our Suzhou, China assembly plant. Lastly, our tax department does an outstanding job of prudently and appropriately minimizing our tax footprint and we anticipate a 23% effective tax rate on adjusted earnings for 2024, which is slightly higher than 2023. And finally, this page shows several capital strategy and other financial assumptions as we begin the year. On capital strategy, we anticipate being very active with share repurchases as I just mentioned. And to support this effort, earlier this week, our Board of Directors approved a fresh share repurchase authorization of $500 million, which we plan to put to good use. We will have a higher net interest expense in 2024 resulting from the eventual refinancing of the 2024 notes, but are also planning $100 million of debt reduction to minimize the impact. We also anticipate increasing our dividend in February for the 12th straight year. On FX, we currently think that rates will have a neutral to slightly negative impact on full year earnings, but this can obviously swing either way, predominantly on the strength of the U.S. dollar versus the euro and a few other currencies used by our global businesses. Finally, you’ll notice a reduction in planned CapEx for the year. Although we plan to continue funding many projects and investments in products and technology for future growth, we are in the harvest phase of many of our larger projects in recent years and plan to be able to scale back spending slightly without sacrificing any future growth plans. I will now pass the call back over to Dave for concluding remarks.

Thanks, Ryan. With field inventory at normalized levels and consumers having their choice of products, it is vital that Brunswick continues to differentiate through a rapid flow of exciting new products and technology, and in just the first few weeks of 2024, Brunswick launched over 15 new products across its brands and businesses. In January, we again participated in the Consumer Electronics Show where we launched two higher horsepower models in the Mercury Marine Avator electric outboard line up, which now contains five models in total. Demand for Avator remains solid, with nearly 60% of shipments in 2023 going to Europe. Sea Ray introduced the new SDX 270 and 270 Surf models with next-generation features, styling, and comfort. The SDX Surf is the first model in the SDX line to feature the Mercury Bravo Four S forward-facing drive and an intuitive wake surfing control system designed jointly by Mercury Marine and Navico Group. Brunswick’s Princecraft, Harris, and Lowe brands also introduced multiple new products at early season shows, featuring Mercury Marine and Navico Group technology. We are also very excited about the new, segment leading Simrad NSX Ultrawide, the industry’s first full functionality high definition, multi-function display, which features a 16 by 9 screen aspect ratio and showcases the seamless interface of the latest Simrad Android operating system. And finally, Freedom Boat Club continues to grow organically and through acquisition, including the acquisitions of its Savannah and Hilton Head franchise territories in late 2023 and two new franchise locations in Spain already announced in 2024. Before we conclude, I am thrilled to highlight the exceptional accomplishments of our teams from across the enterprise that were recognized with a record high number of awards in 2023 and continue to be recognized in early 2024. We wrapped 2023 with 115 major awards for our products, technology, people, and culture. And just in early 2024, the new Harris 250 Crowne won the NMMA Innovation Award at the Minneapolis Boat Show, the new Sea Ray 260 SLX won European Powerboat of the Year, and the Veer V13 won Boating Magazine Boat of the Year in its category. In addition, Brunswick’s products and teams are nominated for multiple awards at the upcoming Miami Boat Show. Thank you again to all our talented Brunswick employees who make these prestigious awards possible. Which leads me to remind you to join us at our Investor and Analyst Event on February 15, 2024, at the Miami International Boat Show, where we look forward to hosting you to see the latest products and technologies from across our brands and businesses, as well as meet with members of our management team. Thank you for joining the call. That concludes our prepared remarks. We will now open the line for questions.

Thank you. Our first question is from Matthew Boss with JPMorgan. Please proceed.

Thanks. So, Dave, maybe could you help rank the topline drivers by segment and just visibility today to improvement as the year progresses? If we could just bridge the delta between the more than 20% decline expected in the first quarter to the full year guide of down mid-single digits, I think, that would be really helpful?

Hi, Matthew. The situation is quite similar across all our businesses to some extent. In December, we saw decreased demand from marine OEMs and more production shutdowns, which impacted our Mercury and Navico Group wholesale orders. Additionally, we reduced production to achieve our year-end boat inventory targets and maintained 37 fish weeks on hand. For the first quarter, we expect continued cautious ordering from Mercury’s OEM customers, which account for about 80% of their sales, and from Navico Group’s marine OEM customers, which represent about 30% of their sales. We will continue to manage our own boat production during this time. Based on early season retail data, we anticipate that orders will start to normalize as we enter the main selling season. By the end of Q1, we expect new boat retail sales to increase by about 10% compared to last year, which is a positive sign. Overall, the factors impacting our divisions are fairly similar, and we expect production and wholesale ordering to return to more normalized levels starting in Q2 and beyond.

And Matthew, good morning. It’s Ryan. Just a reminder, in the first quarter of 2023, we were still working on filling pipelines across nearly all engine categories and even boats. This makes for a more difficult comparison. If you’re planning for it, the first quarter of 2024 should look quite similar to the fourth quarter of 2023, as Dave mentioned.

Great. And then maybe just to follow up, Ryan, as we consider the, I think, it’s roughly 12% operating margin at the lower end of this year’s guide as maybe a potential floor. Could you just elaborate on the $40 million structural cost savings that you cited in your remarks, where in the organization that you found efficiencies and are there further opportunities that you see for potentially additional savings?

Yes, Matthew, this is a cross-enterprise project we’re undertaking. Essentially, it’s aimed at adjusting the overall cost structure of the organization. Considering our strategic plan and targets, we remain very confident in those. However, achieving them by 2027 will require some time, and the timeline is developing as we anticipated, with 2024 expected to be a bit quieter before we see the recovery in subsequent years. We just need to ensure that our cost structure aligns with this timeline.

Those actions are in-flight actions.

Yeah.

If we need to find more, we always find a way.

That’s right.

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

Hey. Good morning. Thanks for taking my call. So I want to talk about inventory. You guys have said that you feel pretty good about where you sit today. Seems like a lot of other players in the industry are speaking to inventories being too high. I guess, what do you think the difference is there? Do you think you’ve controlled your own inventories better than maybe some other OEMs? It doesn’t matter if that’s the case, if you’re ultimately competing with those that haven’t, and I guess, how do we think about inventory to finish 2024, whether in terms of units or weeks on hand?

Yeah. Hi, James. Thank you for the question. Yeah. We did see a lot of commentary about other OEMs noting higher than design inventory levels. We are very comfortable with our inventory levels. I think we explained that we had put a lot of effort into managing inventory in the back half of the year. We did see some relatively abrupt changes in production patterns in December from some of Mercury’s OEM customers. Our production did not change as abruptly because we began to, I think, be tricked down somewhat earlier. And yeah, honestly, despite the commentary, yeah, we feel extremely good about our inventory levels. Does it matter what the industry does? Well, it makes it more difficult for us to predict Mercury and Navico Group wholesale sales, because we tend to experience more choppy ordering patterns in the back half of Q4 and we may be the same in the first half of Q1. But I feel like based on our retail performance in January, which you know is a very small month, but still somewhat encouraging, I don’t think we’re suffering. I think we have the right level of retail incentives, dealer incentives to stimulate demand, and I think we have the right inventory levels. So I’m very comfortable where we are.

And then the last part of your question was, how do you think you’ll end 2024? Well, the plan is to have inventory levels below 2023 end of year levels by the end of this year. Not dramatically, but down a handful of weeks on hand. If retail continues to be a little bit outpacing maybe our expectations, then we can maneuver that a little bit. But right now, the plan would be a few weeks on hand lower at the end of 2024 than 2023.

Got it. Really helpful. And then as we sort of contemplate this 2024 guidance, it sits somewhere between when you gave us the recession scenarios, sort of the modest and the severe recession, despite not being in a recession and I don’t point that out to sort of knock your projections two years ago. But I guess maybe speak to what the divergence is, I guess, as it occurs to me, back then we weren’t necessarily thinking that the macro weakness would be as interest rate driven as it appears to have been. Maybe speak to that. And I guess what I’m really trying to figure out is, if rates in fact do come down starting this year, is there an opportunity for a snapback maybe more quickly than we would otherwise see in previous sort of post-recession scenarios?

Certainly. I'll start with that and then Dave can add more. It's always interesting to consider a downside scenario, one that you have to accept continuously. We anticipated this question on the call this morning. The differences really come down to two main factors. First, the starting point. Remember, we released a one-year scenario in 2022 when we were looking at a budget of $10 EPS for that year while also predicting what might happen if the market dropped significantly within a year. That scenario included some pipeline fill, where despite a projected retail sales drop of 30% to 35%, the wholesale aspect was expected to hold up better. Today, the key differences are twofold: there is no remaining pipeline refill for boats or engines, and the overall performance of the parts and accessories (P&A) businesses has aligned with our expectations but started from a different baseline. The peak performance for P&A occurred at the end of 2021 into 2022. While this segment has maintained a compounded annual growth rate of around 8% to 9% over the last five years, it has seen a slight decline from the highs of those two years when we presented the downside scenario. If you consider the midpoint of our range, approximately $7.50, you might see some benefits from propulsion but also some lagging from P&A. Additionally, we have been active in share buybacks, which has positively impacted our position. Lastly, we have made investments in all our ACES categories, leading to about $0.40 to $0.50 in costs, but we are pleased with that choice. So, those are the primary differences.

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

Hey, guys. Just wanted to touch on the Propulsion guidance, and more specifically, just the margin assumptions. It looks like you are kind of embedding in that guidance about 16% margins, which is a step down of about 200 basis points. From the commentary you provided on the call, it sounds like mix, both product mix and channel mix should be positives. Just help us walk through how you get to that 200 basis point decline.

Good morning, Mike. We anticipated this would draw attention. The main issue is absorption due to decreased volume. As you can see on the EPS bridge, the lack of pipeline fill significantly impacts EPS, largely stemming from volume and sales, which also affects absorption at the Fond du Lac facility. Absorption is certainly the top factor. The second issue is tariffs, which have increased by about $15 million, directly impacting COGS. We’re making efforts to offset this through other means and adjustments in final assembly, but overcoming that $15 million is challenging. Additionally, input costs for materials and labor have slightly risen compared to last year. Although we can still price above these costs, the difference is not as significant as before. These three factors are the primary contributors to the situation, all affecting gross margin. I should mention that, as always, Mercury excels in managing their cost structure, with plans to keep OpEx relatively flat year-over-year, which includes the operational expenses from the recent October acquisition of Flite, along with a recalibration of compensation to target levels.

Okay. That’s helpful. Thank you, Ryan. And maybe just a second question, as we think about the lower end of the earnings range and the higher end of the range, maybe walk us through maybe the big four or five factors driving that. How do you get to the top end? How do you get to the bottom end?

I think, Mike, just one addition to the previous point is that, the absorption issue really over-indexes towards Q1, because we don’t want to get rid of people, line operators in Q1 that we’re going to need in Q2. So there’s a kind of compounding effect in Q1 that will normalize through the other quarters in the year. In terms of top and bottom of the range, I think, bottom of the range would have to be further macro weakness than we anticipate. If retail sales hang in at roughly flat to last year, it’s difficult to see the bottom of the range. But we don’t need a lot of kind of market tailwind to get above the midpoint, really. I think our assumption of wholesale boat units, actually production going down this year in terms of being about 1,000 units below retail is probably a bit on the pessimistic side and then especially with the cost reductions that we will implement in any market scenario that we’ve already described, I think, that will help our leverage on particularly benefit EPS. So I would say downside would have to be additional macro risk of some kind. Upside is a bit better tailwind from the market.

Okay. Thank you.

Our next question is from Megan Alexander with Morgan Stanley. Please proceed.

Hi. Yeah, I don’t want to belabor it, but just did have a follow-up on that Propulsion margin answer if I could. Everything you said makes sense, but if I sit here and take kind of that $15 million tariff out, just to kind of look apples-to-apples versus last year, I’m still getting somewhere in the range of 45%-ish decremental margins. I think you’ve historically kind of talked about volume deleverage in the 20% to 30% range. So can you just maybe help us understand the discrepancy there, because it just seems pretty large.

Yes, Megan, you’re correct. The impact from absorption is significant. We’re coming off a first and second quarter where we were operating at maximum capacity, continuing into the third quarter, and then scaling back to typical production levels for the year. We're reducing production from Fond du Lac by a little more than 10% year-over-year, which becomes an important factor. Additionally, as Dave mentioned, we shouldn’t underestimate input costs. While it’s encouraging that PNOC is positive, in previous years, that spread could have been in the range of $50 million to $70 million, whereas this year, it’s about half of that. This makes it challenging for us to adjust pricing adequately to cover input cost inflation. Finally, I want to emphasize that our guidance includes some estimates. If conditions improve, we know that Mercury has the potential to exceed that margin guidance. However, today, we believe it reflects a balanced approach towards our expected margin for the year.

Okay. That’s helpful. Thank you. And then maybe just another follow-up, would you be able to quantify maybe what the pipeline fill was last year and more of what’s just a hard compare in the first quarter versus what you’ve embedded in terms of what you’re seeing as it relates to the cautious wholesale ordering patterns, just particularly on Propulsion as we’re trying to get a sense for how to think about the cadence of that segment, in particular, beyond the first quarter?

Production levels at Fond du Lac are expected to decline by approximately 10% year-over-year, with most of this decrease occurring in the first and second quarters of the year. This decline primarily involves equipment below 300 horsepower, while there is adequate availability for units of 300 horsepower and above. Therefore, the majority of the 10% reduction will be evident in the first quarter, with a slight contribution from the second quarter.

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

Hey. Good morning. Thanks for taking my question. It’s been a helpful call as always. I guess I wanted to dig into Navico a bit. I think we’re coming on the three-year anniversary this summer of that transaction. And I guess, Dave, I’d be curious to get your take on, what has gone well and what has not gone so well?

Yeah. Thanks, Craig. Yeah. Coming up on the three-year anniversary. So I think what’s gone well is, I continue to believe that Navico is absolutely the right asset for us to own. There was nothing like it in the marketplace and there still isn’t anything like it in the marketplace. It plays very strongly to our move really from a boat company to a technology company. It really has some of the best technology assets in the business. And despite the fact that the financial performance is not what we’d originally anticipated at this time, I would say, there are several factors covering that that I’ll talk about in a second. It is actually doing well, extremely well, in a lot of those sub-segments of electronics. It continues to do well in producing unique solutions that nobody else can produce, like the Fathom system. We’re beginning to see a flow of new products that reflect our directions, like, the Ultrawide, which is, I mean, extraordinarily well-received and other things that will be coming out late in the year. So I think the asset is the right asset for us. We just bought it ahead of a market downturn. One of the things I guess is, if you think about Navico’s kind of mix, it’s about 30% marine OEM, 10% or 12% RV and specialty vehicles, and a little bit less than 60% aftermarket. I think what we did not foresee, a couple of things we didn’t foresee really, were the destocking that is experienced over the past several years, what we think is essentially troughed now and also the really severe decline in RV manufacturing that it continues to experience. So those are the things that we have had to combat. Now, I would tell you that, Navico was about 10% up in March of 2023. We expect that margin to expand in 2024, as the combination of new products takes hold and also as the full year effect of cost reductions take hold. So I would say, positives are strategic benefit and new products coming out. Some of the negatives are more associated with how the market has performed generally, including destocking in the past two or three years.

Yeah. Thank you. Dave, that’s very helpful. And if I could just drill down, like with Mercury, we can very clearly see your share gains show up in the industry data, but it’s less obvious for Navico whether you are getting a larger share of wallet from your OEM customers as you sort of integrate all of those solutions along the lines of your ACES strategy. So I’m just curious, is there a way to frame your share of wallet across the Navico portfolio?

Yeah. We have not broken that out, but since you asked the question, I think we can look into whether we do that on a more systematic basis going forward. I can tell you that the Simrad brand has gained market share last year and continues to do extremely well and we imagine that only accelerating as the Ultrawide, which is unique in the marketplace, takes hold. Obviously, Craig, you’ll be at Miami, and hopefully, you’ll see a whole bunch of Fathom systems appearing and you could call that market share gain if you think about it as the number of OEMs for which we perform fully integrated services. But it’s a good question, and we will think about whether we can establish some KPIs that make it easier to track.

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

Hi, guys. Thanks for the question. I wanted to ask about the Engine P&A guidance. Looks like revenues are kind of expected to be flattish, but EBIT margin is up, I think, 150 bps. Could you maybe walk through some of the drivers there?

Sure. It's a bit of a mixed situation. We believe that Distribution will likely remain somewhat slow, especially during the first part of the year, while our higher-margin Products business is expected to increase, consistent with trends from recent quarters. This business typically experiences a slight price increase along with a slight market rise. We anticipate that this will reflect positively on the Product side, with Distribution lagging behind. Additionally, the transition to our new facility in Brownsburg, near Indianapolis, is progressing well. Although it has been a tougher process in 2023 than we expected, we forecast a stronger performance as we move into 2024 and beyond.

Okay. Got it. Thanks. And then maybe in the 2024 guidance bridge, which is helpful, you also have $0.30 from other as a benefit. What is that exactly?

A lot of the factors contributing to gross margin are numerous, but we didn't want to overcrowd the slide with details. However, you can consider various cost of goods sold and other initiatives we’re implementing above the operating expense line that will help mitigate some of the sales decline, particularly in the first half of the year.

Got it. So it’s like a gross margin. Okay.

Yeah. It’s mostly all, it’s a litany of gross margin goodness. A lot of them are programs that each of our divisions are doing to take costs out at the COGS level instead and also at the same time working on their OpEx.

Okay. Thank you guys. Good luck.

Our next question is from Fred Wightman with Wolfe Research. Please proceed.

Hey, guys. I wanted to come back to the engine refill comments and I’m a little bit surprised that you’re talking about not having as much of a pipeline opportunity there, just given some of the OEM backlog comments that you guys have made historically. And I know that you’ve stopped giving the OEMs who wanted to transition to Mercury power, but are you still seeing conversion for that backlog? Is that conversion more muted just given what’s going on with retail and wholesale? How does that sort of share opportunity stand on like a backlog go forward basis?

Yeah. So maybe I’ll start and Ryan could pick up. We did note share gain as, and clearly, part of that share gain is Mercury getting into more OEMs and getting more share of existing OEMs. There are a couple of notables coming across the line. I think you might see a few in Miami already. So we’re continuing to convert. I think so, if you look at the overall market, obviously, the way the market is behaving is affecting every OEM and that is somewhat reflected in the $1.50 that Ryan included at the start of the bridge. But the additional OEMs that we’re bringing on board and we do continue to do that, and increased mix in others is reflected in that $0.50 of share opportunity.

Our next question is from the boat business. I mean, you guys just posted almost a 6% operating margin in a quarter where you were down over 20% in sales. And if we look historically, I think you guys would be really, really happy with the 6% margin agnostic of sales for up, down, or sideways. So can you just sort of help us maybe give a state of the union for the downside margin performance of that? I mean, you’ve talked about getting back to double digits historically, but is that 6% a pretty good floor going forward?

Hey, Fred. I’ll take this and Dave can fill in. We are quite satisfied. Considering that volume is down nearly 20%, as you mentioned, from Q4 2022, where we achieved a 10% operating margin, which was the fourth out of five consecutive quarters of doing so, we’re pleased with that fourth quarter performance. This is in a context where we have engaged in some additional discounting to boost retail, especially at the start of the season. However, it also showcases significant operational improvements across all our brands. The Boat Group has effectively reduced operational expenses and maintained that reduction. So, I would say a 6% margin is a solid baseline for a quarter with the current volume. You’ve seen our guidance for the full year, and even though we are expecting to produce slightly less than in 2023, maintaining margins in the range of 6% to 8% for the entire year is something that, just a few years ago, would have seemed quite challenging. This reflects the operational efforts across all businesses, particularly focusing on reducing operational expenses and sustaining those cuts.

Perfect. Thanks a lot.

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

Good morning. Thanks for taking my questions as well.

Hey, Scott.

It sounds like you guys are looking for a flattish boat market this year. What are your assumptions as far as getting some help from interest rate reductions from the Fed?

Yeah. I think the interest rate reductions from the Fed and also other global central banks, given our presence in Europe particularly, but also in other markets, has two effects. One is directly impacts financing costs and the other is frees up kind of family budgets, discretionary spending more broadly, and maybe a tertiary effect is just consumer confidence. So, there are a number of kind of tailwinds that hopefully when that cycle begins will be introduced. I would say that, there is a lot of promotional financing around at the moment, including from us. But you will, if you go to the bookshelves or if you look online, you will see many companies offering promotional rates. So, I would say that, a lot of people are not paying, unless that credit rating is not high, they’re probably not paying the nominal rate, which at the moment has dropped about 50 basis points to about kind of 8.5%. I think probably more people are seeing 599, 699 rates. One of the things we are seeing, though, is we continue to see a lot more cash buyers and even though the promotional interest rates pull people in, in a lot of cases, the deal closes with people taking the cash and paying cash. So, I think the primary effect will be there, but the secondary and tertiary effects of more discretionary income and consumer confidence are at least equally as important.

Got it. And then last question on the engine side, Repower. I guess one of the theories is, as you guys have more production capabilities and as the OEM side is falling back a little bit in a tougher economy, that boat owners would Repower their boats with some of your newer products. A, are you starting to see that yet, and B, could you just remind us of the margin dealt on an engine between Repower and OEM?

Hey, Scott. Yeah. I mean, Repower actually had a really nice second half and probably will have a pretty good first half. We actually gained 500 basis points of Repower share in the year, which is pretty big. But still, our Repower share trails our overall U.S. share. So, there’s still room to run there. We don’t talk exacts on margins, but the retail dealer margin certainly is stronger than OEM, just based on volume. So that is definitely a positive on the operating margin side, but we don’t comment on exactly how much that is. But yeah, very good Repower, not only in the U.S., but internationally as well.

Got it. That’s all for me. Thank you.

Thank you.

At this time, we would like to turn the call back over to Dave for some concluding remarks.

Thank you. Well, thank you all for joining us again and for the great questions. We really appreciate them. Despite the challenges, we again delivered a very strong year, the second best ever. You need to forget that, but we’re trying to make sure you don’t, which I think continues to demonstrate the resilience of our portfolio. Free cash flow generation was a particular highlight, I think, in the second half of the year and gives us additional flexibility as we go into 2024. As we noted a couple of times, OEM and dealer customers will likely continue to be cautious in their ordering through a portion of the first quarter. But we think we’ve equipped ourselves very well for the start of 2024. Pipelines are at appropriate levels. We have a wealth of new products. We have great digital properties. We have a well thought out mix of incentives. And we’re also, as Ryan mentioned a couple of times, continuing to control costs. I would say that we prefer a year this year of increasing guidance, and so we’re looking, it’s exciting, I think, that we’re off to a good start with retail. Boat show, we didn’t talk much about, but boat shows sales are maybe single digits down versus last year, but improving as we go through the year. Mix is significantly up into kind of 15% to 20% kind of mix up versus last year, which is very encouraging. So we could talk about all of those things and introduce you to our new products at our Investor and Analyst event in Miami on Feb 14th and we look forward to seeing you all there. Thank you.

Thank you. This will conclude today’s conference. You may disconnect your lines at this time and thank you for your participation.