Good morning, and welcome to Brunswick Corporation's First Quarter 2024 Earnings Conference Call. 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. Thank you, and you may now 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 had a solid start to the year, delivering sales margin and adjusted earnings per share consistent with expectations, despite continued customer caution in the face of economic uncertainty. Our performance benefited from continued market share gains, the wealth of recently launched and well-received new products, and comprehensive cost control measures across our businesses, offset by higher promotions and discounts on some product lines. We also continue to make good progress on our strategic initiatives. Our first quarter net sales of $1.4 billion and adjusted earnings per share of $1.35 were in line with our guidance range and consistent with the anticipated restrained early season marine dealer OEM and retail wholesale auto patterns which drove reduced production rates across our product businesses compared to the first quarter of 2023 when pipelines were being filled. Mercury Marine continued to capture market share with first quarter U.S. outboard retail share up 200 basis points versus the prior year. Our early season boat unit retail performance is tracking with our outlook of flat to 2023. As we move into the core 2024 retail selling season, we continue to work closely with our channel partners to maintain balanced current model field inventory levels and we closed the first quarter with 36.1 weeks on hand in the U.S., which is in line with historical norms. In addition, during the quarter, we successfully completed a debt issuance of $400 million to cover the refinance of our only near-term debt, further solidifying our cash position and balance sheet. I'll now turn to some segment highlights for the quarter. Our propulsion business delivered lower sales and earnings versus a record first quarter of 2023 as boat manufacturers and dealers moderated order patterns and managed production of current model year products and pipelines ahead of the annual model year changeover. We expect OEMs to remain cautious through the model year changeover as they assess consumer sentiment and monitor the macro environment. Mercury continued to outperform the market gaining 330 basis points of U.S. outboard market share in engines 150-horsepower and above. Our engine parts and accessories business continued its steady performance with sales and earnings down modestly from the first quarter of 2023 as anticipated, but increasing sequentially over the prior quarter. Early season weather patterns have been supportive of boating in the Northern U.S. And with normalized inventory levels across the dealer network, continued strong boating participation should contribute to growth for the remainder of the year. As expected, Navico Group had lower sales and earnings versus the first quarter of 2023, but delivered sequential sales growth and consistent earnings versus the prior quarter. Navico Group continues to focus on investments in new products including the recently launched Simrad NSX Ultrawide multifunction display, which has been very well received by customers and is preparing for several important new product launches in the remainder of the year. Finally, our boat business performed to plan with exceptional retail performance by Boston Whaler and Sea Ray at early season boat shows while continuing to introduce new models to support market share gains. Sales and earnings were below prior year, consistent with lower planned production levels, while operating margins improved sequentially. Freedom Boat Club continues to deliver steady membership sales and same club sales in the quarter were mid-single-digit percent above prior year. Freedom has now expanded to 413 worldwide locations. Shifting to external factors now. U.S. GDP and employment remain stronger than anticipated, slowing the recent pace of inflation and consequently the likely cadence of Fed rate reduction, which in turn is keeping consumer loan rates high. We are, however, seeing a higher proportion of buyers with high credit scores financing net purchases than in recent prior periods. And interest in the recently launched Brunswick Retail Finance program continues to increase with more than 35% of Brunswick boat dealers having enrolled. The marine industry is continuing to lobby against the proposed NOAA East Coast vessel speed regulation and advocate for technology-based solutions. However, the exact content of the proposed rule remains unknown, making an analysis of the impacts difficult. As noted, dealer sentiment is generally sequentially improving, but with appropriate inventory levels, they are carefully pacing wholesale orders, particularly for current model-year value product lines. We are working with dealers to deploy a portfolio of targeted discounts and promotions. On a per unit basis, retail and wholesale program spending is in line with pre-pandemic levels, but floor plan support spending is higher. Our investments in digital platforms continue to drive benefits across our brands with more than one-third of Boat Group's sales digitally assisted in the first quarter. Our surveys continue to show strong boating participation levels, supportive of steady parts and accessories demand. Overall boat show results were encouraging with interested buyers, strong lead generation, and sales above prior year levels on a unit basis and with a richer product mix. Our Boston Whaler and Sea Ray businesses demonstrated exceptional retail performance at early boat shows with new models supporting market share gains. Mercury Marine performed well at all major boat shows, recording the highest outboard share at Dusseldorf, Miami, and other key events. Shifting now to a global view of revenue in the quarter. Overall, we saw a 22% sales decline on a constant currency basis, excluding acquisitions. Moving now to U.S. retail performance. U.S. industry new boat unit sales in the quarter declined versus the first quarter of 2023. Brunswick internal retail data outperformed the overall market with particular strength in our premium brands. Our year-to-date global internal unit retail sales are flat to prior year, including a solid start in the first weeks of the second quarter. It is not uncommon to see differences in SSI reporting and internal data at this point in the season, and our expectation of a flat retail market for the full year currently remains unchanged. U.S. outboard engine industry retail units declined 9% in the first quarter versus prior year. Mercury continues to outperform the market with an overall share gain of 200 basis points in the quarter. We continue to successfully manage both pipelines, and we ended the quarter with U.S. inventory at 36.1 weeks, in line with expectations and historical norms, and with 13,500 units in the pipeline versus nearly 18,000 units in 2019. International boat pipelines were slightly higher, which is normally the case. Notably, our first quarter U.S. boat pipelines declined versus the end of the fourth quarter of 2023, which is unusual given the first quarter is commonly a period of building pipelines ahead of the selling season, underlining the caution being exhibited by our channel partners. I'll 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 first quarter, consistent with guided expectations despite a continued cautious macroeconomic environment. Versus a strong first quarter 2023, net sales in the quarter were down 22%, resulting in an adjusted EPS of $1.35. Gross margins have remained resilient. Adjusted operating expenses were down $11 million versus Q1 2023, and free cash flow performed better than anticipated as CapEx spending continues to moderate given the conclusion of several major capital projects in 2023. First quarter sales were below prior year as the impact of continued measured wholesale ordering patterns by dealers and OEMs, coupled with higher discounts in some business segments was only partially offset by annual price increases, market share gains, and benefits from well-received new products. Adjusted operating earnings were down versus prior year as a result of the impact of lower net sales, unfavorable changes in foreign exchange rates, and slightly higher input costs, which more than offset benefits from significant cost control measures throughout the enterprise. Now we'll take a look at each reporting segment, starting with our propulsion business. Sales and earnings were lower as anticipated as boat manufacturers and dealers moderated order patterns managing production of current model year products and pipelines ahead of the retail season and model year change. However, Mercury continued to gain outboard engine share, as Dave discussed earlier, and together with the impacts of 2023 pricing gains and aggressive cost control measures, partially offset the impact of lower sales, unfavorable changes in foreign currency exchange rates, the lapping of prior year favorable variances related to timing of capitalized inventory, and lower absorption from reduced production. The engine parts and accessories business continued its steady performance with sales and earnings down modestly from the first quarter of 2023 as anticipated but sequentially increasing over the prior quarter. Sales in the high-margin products business were down very slightly, while year-over-year distribution sales trends continue to improve. Segment operating earnings and margins decreased primarily due to the sales declines, which offset the impact of pricing and cost control. Note that our transition into the Brownsburg, Indiana distribution facility is essentially complete, increasing our ability to service our international parts and accessories customers in a more timely fashion. The result in the first quarter was growth in product sales in international regions, while sales into U.S. channels were slightly down as dealers remain cautious on their inventory levels, which remain normalized during the off-season. Navico Group reported a sales decrease of 24%, driven by reduced sales to marine OEMs as they moderate orders to control the pipeline of their current model year products partially offset by strong new product momentum and improved RV sales trends. Segment operating earnings decreased from the impact of lower sales and increased discount activity which was only partially offset by lower operating expenses. 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 the prime retail selling season. Sales were down 26% versus Q1 2023 due to softer wholesale orders as our channel partners continue to order cautiously ahead of the model year changeover, partially offset by the favorable impact of carryover pricing and share gains. Our premium brands continue to perform well at both wholesale and retail. Adjusted operating earnings were down primarily due to the lower sales and lower absorption from the reduced production partially offset by focused cost reduction activities. Freedom Boat Club, which is included in business acceleration, had another solid quarter, contributing approximately 9% of the Boat segment's revenue during the quarter, while seeing very steady membership levels despite the macroeconomic uncertainty. Strong performance across our businesses allowed our first quarter performance to match expectations. Despite our year-to-date internal boat retail being flat to 2023, the continued economic uncertainty is resulting in cautious ordering patterns by our channel partners, making the rate and timing of wholesale acceleration and the balance of peak season wholesale sales between the second and the third quarters more difficult to predict. Despite the challenging conditions, we remain focused on moving forward with our new product plans and growth initiatives and driving resilient EPS and cash flow while continuing to balance production to support retail sales and manage pipelines. As a result, we are not materially changing guidance as we enter the main selling season. Please see the appendix for additional guidance regarding anticipated segment metrics. I will wrap up the financial update by sharing certain updated P&L, cash flow, and other capital strategy assumptions for the full year. First, we increased our dividend by 5% in February and now anticipate a full year dividend of $1.68. Next, FX is trending more negative than our initial expectations given the continued strength in the U.S. dollar, and we now anticipate up to a $15 million negative earnings impact due to FX rates. We hope to offset a portion of this impact with a slightly lower effective tax rate of approximately 22%. Lastly, as we continue to see near-term dislocation in our stock price, and our cash generation remains strong, we anticipate spending approximately $250 million on share repurchases throughout the year, up $50 million from our initial estimate. I will now pass the call back over to Dave for concluding remarks.

Thanks, Ryan. We launched an extraordinary 25 new products across our businesses and brands during the quarter, representing an important contributor to near-term and future growth. Now I'd like to highlight just a subset. At the Miami International Boat Show, we introduced some exciting additions to the FliteBoard product line. The Flite AIR and Flite AIR PRO are the most attainable models in the brand portfolio and are enablers to expanding participation to a broader set of consumers, allowing significantly more people to enjoy the flight boarding experience. Mercury expanded its joystick control technology to a broader set of single-engine board applications. Its joystick steering for single-engine vessels is compatible with the Mercury Verado family of V8, V10, and V12 outboard engines from 250 to 600 horsepower. Mercury also launched the fourth and fifth models in the expanding Avator electric outboard product line. The 75e and 110e are the most powerful models introduced to date. We're also very excited about the many new boat models launched across our boat brands, including the new award-winning Boston Whaler 365 Conquest and Harris 250 Crowne, which both debuted at first quarter boat shows and feature Mercury high horsepower outboard engines and advanced Simrad electronics. We are seeing a very positive response to the recently launched Simrad NSX Ultrawide, which is the industry's first full functionality, high-definition multifunction display, and showcases the seamless interface of the latest Simrad Android operating system. In addition, we launched the new Lowrance Eagle, which is the latest offering in the brand's entry-level fishfinder/chartplotter lineup and features improved clarity and depth performance through high-definition sonar. And finally, we continue to expand our Boateka-certified pre-owned boat business with the opening of the newest Tampa location, which is strategically located near Freedom Boat Club's largest corporate territories in Tampa Bay and Southwest Florida. Boateka's newest location will service the facility to accelerate certified pre-owned sales across the Southwest Florida region. Before we conclude, I'm thrilled to highlight the exceptional accomplishments of our teams from across the enterprise that were recognized with a record high number of awards in the first quarter. Brunswick was named to Forbes' 2024 America's Best Large Employers list for the sixth consecutive year and also named to Newsweek's list of the most trustworthy companies in America for the second consecutive year. Brunswick innovation also continues to be recognized, including with the Consumer Electronics Show Innovation Award for the Mercury Avator 20e and 35e electric outboard motors. And we received many awards for our products, innovation, customer service, and marketing at early season boat shows, including a record 16 total awards at the Miami Boat Show. Thank you again to all our talented Brunswick employees who make this recognition possible. That's the end of our prepared remarks. We'll now open the line for questions.

Our first question is from James Hardiman with Citi.

I wanted to dig in a little bit on the retail commentary, trying to tease out the industry data versus what you think is right. So just so I'm clear, your internal boat data for Brunswick suggests that you guys are flat. But you don't think the industry is flat year-to-date. That's more a commentary of how you think the industry is going to be for the year. Just wanted to make sure I understand that. And then I guess just more broadly, as I'm sure you're aware, your biggest customer put guidance for the second straight time today. And in particular, they seem to be surprised by the retail momentum so far this year. So just trying to connect those two dots. You guys seem to think that retail is going very much as planned. They seem to be surprised by the weakness. So help us understand.

Thank you, James. A few points to discuss. You are correct that our internal retail is largely flat for the year, including in the first couple of weeks of April. There often seems to be a mismatch at this time of year, particularly between SSI industry data, which shows a decline of about 10% in the main powerboat segment, and our internal retail figures. SSI indicates that the industry as a whole is down 10%, with Brunswick down approximately 5%. This suggests a dislocation of about 5% for Brunswick. In the first quarter, which accounts for roughly 15% of the entire year, we are dealing with relatively small numbers but a wider spread in data. There's a specific occurrence in the first quarter where you might expect SSI registrations to carry into the next quarter, but they are typically offset by sales from the last month of the previous quarter. However, in this case, the sales for Q4 2023 were extraordinarily low, resulting in minimal leakage into Q1. Therefore, we see more leakage spreading into Q2 instead of Q1 compared to the end of last year. This could explain part of the situation we are observing. While we cannot definitively declare what the entire industry is doing, we believe we are capturing some market share, as indicated by about a 50 basis point increase. Nonetheless, this is unlikely to fully explain the difference between SSI and our internal retail figures. As usual, we anticipate that the gap will narrow over time.

Got it. And then the point on your biggest retailer, just sort of the disconnect. And I would add a lot of retailers sound a lot more negative than you guys on the first 3, 3.5 months of the year? Any thoughts on what feels at least in terms of tone like a bit of a disconnect.

Yes. While I can't speak for them, I believe we would likely have a mutual understanding. I expect we would agree that sales of our premium product lines, particularly Sea Ray and Whaler, have been strong. I'm not aware of what they have said regarding this, but the sales for Sea Ray and Whaler have performed well. If there are weaknesses in other areas, I cannot specify what those are or how I would address them. However, it's evident that both Sea Ray and Whaler had a solid first quarter, as seen in the sales data from events like Miami and Dusseldorf that we reported.

Got it. And if I could just sneak in one more. Next month, 6 weeks are going to be critical. What are you looking at most closely? I feel like us as analysts may become sort of weathermen this time of year. And for you guys, in particular, given the parts and accessories business, the weather seems like it's critical. But maybe walk us through what you need to see or don't want to see in the context of your ability to hit the full year numbers.

Weather is a factor, but I don’t believe it's one of the key elements we’re focusing on, nor is there any unexpected extreme situation. We will primarily examine internal order rates, particularly from Mercury and Navico Group, which will be influenced by production rates at our OEM customers. We will also consider order rates from retailers for parts and accessories, including for Navico. As we enter the model year, the overall industry appears healthy, with about 75% of inventory consisting of current model year products compared to the prior year, which is a good sign. However, as we approach the model year changeover, there will be efforts to minimize additional current model year products. When we reach June, we anticipate an acceleration because they will need to provide the 2025 model year products for the upcoming year. In the current promotional environment, the cost of holding prior model year inventory is greater than in less promotional times, as discounts will be applied to clear out that older inventory. We are trying to determine the timing of the inflection point, and we believe this year's transition may be more pronounced than in previous years due to the penalties associated with holding onto older products. Ultimately, we will focus on order rates from our OEM customers.

That's really good color. Thanks, and good luck for the next few weeks and months.

Next question is from the line of Scott Stember with ROTH MKM.

Have you seen any change on the credit side, whether it's the creditworthiness of customers coming in? And have you seen any tightening at the retail side on a credit perspective.

We have seen people with high credit scores coming back into the market with financing a bit more than we saw in recent periods, I would say. So I would say, yes, people with good credit scores are coming back and financing a little bit more than they were in prior periods. Credit tightening. I don't think there's any particular tightening at the moment. We're in a relatively stable period, I would say, and have been for the last probably 6 months, I would say, in terms of rates and credit score requirements.

Got it. On the parts side, sell-in was down 3%. The RV side is showing some signs of recovery. Could you discuss what you're observing in terms of POS and actual retail demand for both?

Yes. I believe the retail demand remains quite strong. Our products business experienced a slight decline of 3%, but it's expected to stabilize. What we're noticing in the P&A distribution business seems to mirror the trends across all retail channels, where customers are aware that the product is readily available, leading them to hesitate in building up inventory at this time. They are clearly mindful of their own financial positions. Therefore, it appears that the current availability is influencing their inventory decisions. There doesn't seem to be any deeper reason behind this behavior.

No. The only thing I would point out also is our Brownsburg, Indiana facility is running at almost 100% capacity. It's up and running, and we have put behind us the kind of startup periods. And that efficiency is allowing us to service all of our customers a little bit better. But certainly, our international customers are able to get product quicker. Inventory levels in the channel seem to be quite normal. And so we would anticipate given we're lapping periods of a little bit slower time to the end of last year that the next three quarters for parts and accessories should be growth quarters.

Got it. And just one quick last question. David, you mentioned model year changeovers. Can you discuss the timing involved? When many of your competitors have numerous models in the pipeline, it tends to slow things down. What is your perspective on timing and possibly pricing?

The model year changeover period has specific legal and regulatory guidelines, which prevent us from introducing new models into commerce before June 1st. Typically, this changes between June 1st and the end of July, depending on the current market conditions. However, due to the penalties associated with additional discounts on older models, we anticipate that most customers will prefer to introduce new models earlier, particularly in the first half of June. Currently, we are within a six-week timeframe leading up to this changeover, making us expect a cautious approach to inventory building during this period, which we are observing. I apologize, I didn't catch the other part of your question, Scott.

Yes. And just on general thoughts on pricing.

Pricing. Yes, our pricing will be very modest this year, and we'd expect that across the industry.

The next question is from the line of Megan Alexander with Morgan Stanley.

I would like to follow up on some of the earlier questions. In the prepared remarks, you mentioned implementing more targeted discounts and promotions, particularly for higher floor plan support. My first question is whether this is being absorbed elsewhere in the profit and loss statement, considering you didn’t adjust the guidance accordingly. Secondly, since you cannot predict when retailers will start placing orders for 2025, why not adopt a more aggressive approach to support dealers through promotions at retail and push older models? Or, regarding Scott's earlier question, is this more about the current competitive landscape?

Yes, I would say that when we mention increased discounting, we are primarily comparing it to the previous year rather than our plan. The discount rates are in line with what we anticipated. In terms of targeting, we do support moving prior model year products in collaboration with our retail partners. The focus is really on model lines and segments. Our premium product lines do not need a lot of discounting or promotional support at the moment. It's not completely absent, but it's relatively low compared to some of our value product lines and fiberglass products, as well as some more budget-friendly aluminum products that require more support. Certain pontoon product lines also demand additional support. Thus, it depends on the specific product lines and segments that need assistance. We are also aware that some of our models will undergo significant changes in upcoming model years, while others will see less significant revisions. For those models being significantly changed, we will increase promotional support to help move out the older model year products. Overall, while discounting promotions are higher than the previous year, they remain consistent with our planned expectations.

Understood. That's helpful. Just one quick follow-up. I see that you think you'll be able to offset the FX and incremental headwind with the tax rate and the higher share repurchase. Given the current situation with the Fed and the uncertainty, even though it's early in the year, was there any consideration to adjusting the full year guidance? Or could you provide some context on how you arrived at that decision?

No, not really. I think, Megan we gave ourselves some space in the guide at the beginning of the year. I think the $7 to $8 is a pretty decent amount of space. If we thought that was under threat, obviously, we would have considered it, but we don't think it is at the moment. Yes, certainly, there are some ups and downs, and I'm very pleased that we were able to cover even in Q1 that the FX headwind. I think it's obviously, given the market today, particularly it's good to be in the market with more share repurchases. We're obviously biasing to the first half of the year on that. So no, no consideration of changing that at the moment.

Our next question is from the line of Craig Kennison with Baird.

I’ll start with my first question. Dave, you mentioned the Atlantic speed limit proposal, which has been drawing increased attention from analysts. You also brought up a potential technology-based solution that could replace a regulatory approach. I'm curious if you have any innovations in the works that could contribute to this solution, and whether you think regulators would be receptive to that kind of proposal.

Yes, we have been very active in promoting both existing and potential future technological solutions. The proposed rule is a significant overreach and an ineffective way to address the issue. It really seems like it's more of a placebo. The evidence supporting claims that boats 35 feet and longer contribute to whale deaths is negligible; we have only tracked one case in the last 20 years. This approach is excessive. If the goal is to address the issue, we need to incorporate boats and infrastructure, using technologies like AIS systems for tracking or sonar and vision systems. There are far more effective ways to handle this than what is currently being proposed. Regarding the rule, we don't have a clear understanding of its contents; we know of some drafts, but we won’t see the official version unless it is published. Predicting the impacts is challenging. One analyst analyzed the potential effect on 60,000 boats over a 20-year lifespan, estimating a replacement of 3,000 boats, factoring in our market share. However, the proposed rule indicates limits would only apply during the off-season, from November to April, which is typically when boats are inactive in that market. There’s also the assumption that a 37-foot boat wouldn’t be replaced by a smaller 34-foot model. It's really hard to forecast how this will all play out. Our main concern is the precedent that this could set rather than the specifics of this particular implementation. It's a considerable overreach.

Our next question is from the line of Mike Swartz with Truist Securities.

First question, I may have missed it, but did you say with global, are there weeks on hand or pipelines were at the end of the quarter? And then just as it pertains to the full year guidance, what are you assuming are either weeks on hand or pipelines by the end of the calendar year?

We don't have the account here in the 37-ish range. Yes, about 37.

Down a couple of weeks, end of the year.

So 37 by the end of the year?

Yes, that's correct. It's currently 36, and we anticipate it to reach about 37 by the end of the year. That is what we are planning our production around.

Got you. And then just a second question. We get a lot of feedback on this from people in the industry. But I guess what are you doing to address affordability? I mean, I would assume there are things you can do around pricing, things you can do around content. But maybe at a high level, what things are you addressing through affordability, maybe with your model year '25 product line?

Yes, certainly. When considering how to make a boat affordable, there are many factors we can influence regarding base content. We may adjust the base content, and I think it's important to note that we offer one of the widest product lines available. Our offerings range from boats priced at $1,000 to those that exceed $1 million, providing numerous entry points into the market. We can control the base content to ensure we introduce options that may not have been available before. However, we also need to consider broader issues like resale value, which consumers are quite mindful of. Some boats shouldn't have content removed since this is similar to the car market; if someone intends to resell a boat in three years, lacking certain key features can lower its resale value. Consumers are generally aware of this and take resale value into account when making purchases. Therefore, while we will adjust some base content to create new options, our diverse product line primarily drives our strategy.

Our next question is from the line of Matthew Boss with JPMorgan.

So Dave, just to follow up on wholesale. Could you just elaborate on the visibility today that you have in the second quarter relative to the back half wholesale orders? And just maybe how best to think about the drivers behind the OEM caution that you cited today relative to the sequential wholesale improvement that's expected throughout the year?

Yes, the key factors driving this are that retailers are not eager to hold onto current model year inventory longer than necessary to support sales before the transition, which for most will occur in June. They typically need to offer additional discounts or promotions to sell off last year's models. When customers visit a dealer in June and see both the 2025 and 2024 models, the dealer will likely need to boost promotions for the 2024 model. That's the situation we're facing. Additionally, there is a general sense of caution regarding consumer behavior and whether it differs from recent trends. Currently, we have limited insight into dealer orders for our smaller products in the third quarter. However, for our larger products, such as premium boats, we have a clearer view, and since those boats take time to manufacture, orders are placed well ahead of June or Q3. We can already see strong orders for those brands in Q3, so while we have less visibility for value products, we have a stronger perspective on the premium products.

Great. And then maybe, Ryan, to follow up. Just given the caution on overall first half wholesale orders, could you speak to how you're managing costs in the expense base to offset the related absorption headwind.

Yes. Obviously, our first quarter kind of speaks for itself, right? We took $11 million of OpEx out versus the same quarter last year. And all of our business units played a part. It wasn't just one unit or a corporate. So we have cost programs throughout the entire company, both to launch manageable costs. So things like spending on travel and things like that, but also making sure that we're keeping our gross margins as strong as possible, right? It's a two-part story. You can only take out so much OpEx at a time. But as you keep your gross margins stronger, that obviously plays a big role over time. And we've shown the resoluteness of those margins here over the last several quarters. So we will continue to be very mindful of costs as we progress. But obviously, as new models come out with the model year and other new products come out, where product margins continue to grow, that will help the gross margin line as well. So all of that is kind of ingrained in everything we do today.

Our next question is from the line of Fred Wightman with Wolfe Research.

I'm hoping we could just put some of the retail and wholesale discussions about the first half and the back half in the context with the 2Q guide that you put out there. So on the earnings specifically, it looks like that's a little bit below the Street. And you've talked about some of the difficulties predicting OEM build schedules. So if we look at that 2Q number, today, is that sort of where you thought it would be at the start of the year? Or are you assuming a little bit more back half weighting, just given the fact that it sounds like people are holding off until model year '25 start to hit? How should we think about the cadence, I guess, versus where it was 3 months ago?

Yes. It may seem slightly below expectations. However, if you consider the first half of the year, we essentially met our Q1 target. The consensus for Q2 was around $203, while the midpoint of our guidance is $195. So, for the first half, we are only $0.08 off, which is not a significant difference. Regarding the mentioned factors, we aim to provide a range that is realistic across various scenarios. That's what we took into account. Ryan?

Yes, most of that could come from foreign exchange. It has clearly had a significant impact. We mentioned earlier that the effects of exchange rates are more detrimental than the benefits from the tax rate. While the tax rate does have some influence, it won't be sufficient to offset the negative impacts of foreign exchange if the dollar remains as strong as it has been during the first 15 weeks.

Maybe one of the considerations here is obviously in the back half of '23, that was a tough half, the fourth quarter, particularly when we were destocking heavily in the face of reduced orders from OEMs providing us with a better competition.

That's fair. If we shift to Freedom, we've discussed the new boat retail environment in several ways during this call. It seems that you're not observing any signs of churn or unusual cancellations. Can you share any insights regarding customer loyalty or how that might counterbalance some of the delays or deferrals in purchases in the near term?

Yes. I'm not entirely sure about the last part regarding the potential offset. It's certainly a possibility. Churn remains around 10%, which has been consistent in recent history. I can say that Freedom is benefiting from not being affected by the cumulative inflation impacts that boat purchases typically experience, nor is it impacted by the higher interest rate environment since very few people are financing their entry fee. Overall, we believe it's somewhat insulated from the broader macroeconomic factors affecting durable goods purchases. Freedom is continuing to grow, and we are pleased to see year-over-year increases in same club sales, which is very gratifying. So, yes, the model is performing very well and is definitely supporting our boat business by driving additional unit sales.

Next question is from the line of Jaime Katz with Morningstar.

I want to focus on Freedom Boat Club. I think the statement on the call was that same-store sales or whatever metric was used. So it's up mid-single digits. And I'm curious if there's been a shift that you've seen from what would traditionally be buyers to maybe members in the club and whether there's any way to discern that? And then after that, is FBC still sort of slated to run at that mid-single-digit rate growth over the rest of the year?

Yes, we're delighted with the performance of Freedom, not just in the domestic market, but also now in European markets where there's a heavy presence and the Australian market, and you should expect to see us expanding to other regions, other geographies as well, since the model seems to be very robust in those areas. I don't know if I can tell you we may have the data to track if recent members are kind of trading off buying a boat or going into Freedom. I don't have that data. But we could take a look at it to see if there's any particular trend in that regard. I go back to the original data that we got when we were contemplating the acquisition of Freedom, and that was that very few Freedom members were contemplating buying a new boat. But one of the things that we do benefit from now is that Freedom has a concierge service so that anybody who's in Freedom and wants to buy a new boat is directed to one of our brands. So that's extremely helpful. Yes, Freedom continues to grow, and we anticipate solid growth for the balance of the year. I can't remember the growth rate exactly that we're anticipating. Did we make publish it? Yes, we didn't publish a growth rate. But I think, yes, we expect solid growth through the balance of the year.

Okay. And then I know this was touched on earlier, but I'm assuming that the flattish market outlook is contingent on some internal look for interest rates. So do you care to share with us what your internal expectations for rate movements are over the remainder of the year?

Yes, I believe everyone is adjusting to the changing circumstances. However, we don't have any specific insights to share.

No. Our call for a flat market did not expect multiple. I believe it is distinct from the general interest rate environment, so we would not link those two on a direct basis.

One thing to consider is that some of the promotional activity involves dealers reducing interest rates, offering promotional rates. Consequently, many people financing their purchases are not using the base rate but are instead financing at rates like $499 or $599 with a promotional financing rate.

Our next question is from the line of Xian Siew with BNP Paribas.

There's been some questions about, I guess, new boat sales. So I wanted to ask about engine retail, which was down, looks like 9% per the slide, and you gained some share, so maybe let's say, you were down, I don't know, 6% or 7%. It's like how does that track versus your expectations going into the year?

Yes, that aligns with our initial expectations for the quarter. We are very confident in our ability to continue outperforming the market and gaining share, particularly in the 150-horsepower and above categories. We anticipate this trend will continue. Retail performance will depend on OEM production schedules and to some extent, the robust repower channel, where we are also gaining share. Overall, we are performing as expected at this time, and although it is somewhat reliant on OEM production schedules, our core consumers are consistently taking more share even as the industry overall may be experiencing a slight slowdown.

Okay. Got it. And maybe also following up on that in propulsion. I think mix was a benefit last year as you were kind of restocking some of the higher horsepower engines. It sounds like maybe that continues a bit because you're kind of mentioning the higher horsepower again? Or do you kind of see a more normalization of that mix effect?

Yes. No, there's two components to mix, right? There's the product component and the customer component. I would say the product component continues to be a positive as again, market share gains and high horsepower continue and that premium product continues to be quite strong. And then consumer mix changes from quarter to quarter depending on who is buying it at wholesale. And in Q1, it was pretty neutral.

Our next question is from the line of Joe Altobello with Raymond James.

So first question, maybe big picture. You mentioned flattish U.S. marine industry this year. Q1 is down 10%. And I know the months do start to get more important over the spring and summer. But what's going to get retail to return positive? And does pricing need to adjust to start to see unit growth again?

Joe, I believe we need to adjust our pricing. Currently, the transaction prices are significantly different from the suggested retail price or recent historical pricing due to the promotion and discounting environment, especially for value product lines. One of the tools we have now is the ability to perform A/B testing in localized market areas to determine if additional promotional discounting can boost sales. In some locations, we find that it does, while in others, not so much. At this point, I don’t think transaction prices are a major factor overall, but they are positively influenced by the current levels of discounting and promotions. To encourage consumers further, having good weather during the season will help, as it always does. Additionally, a bit more clarity in the macroeconomic environment would also be beneficial.

Got it. Okay. And just a follow-up on that. You said you anticipate shipping model year '25 a little earlier than normal. Any sense for when we might see competitive product in the channel? And could you guys have a bit of an advantage for a few weeks?

I believe that most people will transition to the new model early this year, so I am unsure if we'll gain any advantage from that. However, we are continuing to gain market share in the boat segment. While we often discuss the engine side, according to SSI, we've increased by 50 basis points so far this year. Our investment in new products is resulting in many attractive, modern designs featuring strong, unique technology that benefits us overall. We will keep ensuring that our product lines have the most appealing designs and best features. I see this as a significant source of our competitive advantage.

At this time, we've reached the end of our question-and-answer session. I'll hand the floor back to Dave for closing remarks.

All right. Thank you all very much for joining us and for the great questions. As you saw, despite the challenges, retail is currently proceeding more or less in line with our expectations, and we delivered a very solid quarter. I think the resilience of our portfolio is very much on display. Gross margins held up really well, and our cost control discipline is on display as well. I think we did a really nice job in the quarter, and we'll continue to do that. Field inventory levels remain extremely well balanced. So we don't have excess inventory, and we think we're really set up well for the balance of the year. Our free cash flow continues to be strong. And obviously, we did a really timely debt issuance. So that allows us to increase share repurchases at a time when today, I'm pleased that we're going to be in the market with more share repurchases early in the year. We're going to bias that obviously to the first half of the year. So overall, I think a solid quarter and a very balanced view of the year ahead. Thank you.

Thank you. This will conclude today's conference. You may disconnect your lines at this time, and thank you for your participation. Have a wonderful day.