Brunswick Corp Q2 FY2024 Earnings Call

Good morning, and welcome to Brunswick Corporation’s Second Quarter 2024 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. Please go ahead.

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 prepared 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. With high interest rates continuing to pressure consumer budgets and suppressed discretionary spending, the introduction of new model year products at the beginning of the important month of June did not catalyze bulk purchases as we had anticipated and our second quarter results were slightly below expectations. Without strong peak season momentum, the continued slower retail sales combined with higher levels of discounting and carrying costs have increased pressure on dealer and channel partner profit margins, resulting in ongoing conservative wholesale ordering patterns even for new model year products. In turn, this is causing OEMs to maintain lower bulk production rates through the main selling season, with impacts to propulsion and Navico Group OEM orders. With slower new boat retail sales in the peak sales months, we now expect full-year unit retail sales to be down approximately 10% versus our original forecast of flat. As a result of heightened demand stimulation efforts focused on clearing more aged field inventory, our remaining field inventory is very fresh, with approximately 85% of units being current. And our focus continues on leveraging our new products and adjusting production levels to maintain or gain share in key categories, while diligently managing field inventory levels to end the year with weeks on hand at appropriate levels and units below prior year. Despite sales and earnings below guidance, the resiliency of our portfolio is being demonstrated, with our recurring revenue businesses and channels including our Engine P&A business, Propulsions and Repower business, Freedom Boat Club and Navico Group's aftermarket sales, contributing more than 50% of our Q2 adjusted operating earnings. In addition, our businesses delivered strong cash flow, enabling $170 million to be deployed for share repurchases year-to-date and further solidifying our focus on returning value to shareholders. Turning to some highlights from our segments in the quarter. Despite our propulsion business delivering lower sales and operating earnings versus the second quarter of 2023, year-to-date we continue to gain share in outboard engines, with more than 48% overall share of the US outboard market. In addition, propulsions controls rigging and propeller product categories had a strong quarter, with operating margins ahead of the same period in 2023. Our Flite eFoil business also had its strongest ever sales month in June. With boating participation continuing to be very solid in our major global markets, our Engine Parts & Accessories business had a strong quarter, with sales and operating earnings, up versus the second quarter of 2023 and we completed the full transition of engine P&A distribution to our new state-of-the-art facility in Brownsburg, Indiana. As anticipated, Navico Group had lower sales and operating earnings versus the second quarter of 2023, due to reduced marine OEM order rates and persistently slow RV orders but continue to show stability with sequential improvement in aftermarket sales and overall sales and earnings consistent with first quarter results. Finally, our Boat business had a solid performance given market conditions, with sales and operating earnings below the prior year quarter, consistent with lower planned production levels. Freedom Boat Club continued to deliver steady membership sales growth, while adding two more flagship locations in Denmark and the UK and recording an impressive 200,000 member trips in the quarter. Expanding on the external environment, with the majority of the retail selling season behind us, it is evident that the 2024 U.S. marine retail market is underperforming versus our initial expectations, due to the continuing high interest rate environment. And while there is now a higher probability of interest rate relief beginning in September this will be after the main selling season and will likely have a minor impact on 2024 and be more of a potential tailwind for 2025. Dealer sentiment is sequentially improving. However, the slower pacing of wholesale orders continues as the weaker retail environment leads to a desire for more conservative inventory levels. Discounting and promotion levels remain elevated, particularly on prior model year products to stimulate retail movement. Our investments in digital platforms continue to drive benefits across our brands with close to 40% of boats of Freedom Boat Club membership sales in Q2 being digitally assisted. OEMs and channel partners continue to moderate production levels to adjust to the environment. And in the absence of external stimulus, we do not now foresee this pattern changing significantly through the remainder of the season. Despite these challenging conditions we continue to see strong boating participation, supporting our resilient recurring revenue businesses. We continue to invest in and launch many exciting new products and technologies across all our businesses and product lines. With the intent to position us for market share gains and to ensure we have the freshest portfolio when the market returns to growth. Finally, the previously proposed North Atlantic Right Whale Vessel Speed Restriction Rule was delayed to November 2024 and in the administration's most current regulatory agenda. Moving now to U.S. retail performance, we saw a weaker Q2 U.S. retail market than anticipated with U.S. industry new boat unit sales in the quarter declining significantly versus the second quarter of 2023, driven particularly by a week of June. U.S. outboard engine industry retail units declined 6% in the second quarter versus prior year. As mentioned, Mercury Marine U.S. overall year-to-date outboard market share is holding at around 48%, up slightly from 2023. And our share of 350-horsepower and above engines exceeds 70%. As customer OEMs modulate production, which in some cases requires extended manufacturing shutdown periods we expect market share data across engine and boat brands may be more noisy than normal for the remainder of the year, although we anticipate gaining additional share in some areas. During the quarter we continued to diligently monitor pipeline levels. We ended the quarter with 33 weeks on hand and 11,500 units in the U.S. pipeline slightly above prior year. And also manage year-end pipelines, on a full year basis we currently plan to wholesale around 1,500 fewer units than internal retail unit sales which represents approximately a 7% reduction in ending inventory versus prior year. Before I turn it over to Ryan, I wanted to quickly walk through the components of our updated adjusted EPS guidance, of between $5 and $5.50 per share. As you can see, just about all, of the anticipated decline from our view in April is related to the softer market conditions that have persisted through the main retail selling season. And the resulting channel dynamics we believe we will experience for the remainder of 2024. The most significant change since April is the combined impact of the weaker market and resulting lower wholesale sales in an environment where we anticipate pipeline inventories to be flat-to-down across all our businesses. We plan to wholesale several thousand fewer boats this year than originally planned and despite continuing to take market share, Mercury will correspondingly ship fewer engines to OEM partners who have also lowered production to be consistent with demand. The next two factors are directly related to the slower market conditions. First, all our businesses are experiencing lower absorption and slightly higher manufacturing costs due to the lower production levels. Second, we continue to use promotions and discounting to drive retail sales and to keep our inventory as fresh as possible. Offsetting these factors is our combined focus on driving down controllable operating expenses. We anticipate ending the year with OpEx down almost 10% from initially planned levels, while still protecting spending on key growth initiatives and projects to advance our strategic objectives. Despite this year not unfolding as we had hoped and anticipated, we continue to make prudent decisions and expect to finish 2024 in a strong balanced position, while preparing to fully capture the upside when the market returns to growth. 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's second quarter results were slightly below expectations, but remained resilient despite a challenging macroeconomic environment and much softer U.S. retail marine market than anticipated. Versus the second quarter of 2023, net sales in the quarter were down 15% with adjusted operating margins of 12.5% resulting in an adjusted EPS of $1.80. Gross margins continue to remain resilient. Adjusted operating expenses were down $32 million versus Q2 of 2023 and free cash flow performed better than anticipated with free cash flow conversion of approximately 140%. Second quarter sales were below prior year as the impact of continued lower wholesale ordering by dealers and OEMs coupled with higher discounts in certain business segments was only partially offset by annual price increases 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 and higher manufacturing costs primarily related to absorption from lower production partially offset by significant cost control measures throughout the enterprise. On a year-to-date basis, sales are down 19% resulting in an adjusted diluted EPS of $3.14, down 36%. The entire enterprise remains focused on reducing operating expenses, which are down $43 million versus first half of 2023 levels. Finally, year-to-date operating deleverage of 27% remains slightly higher than the midpoint of our assumptions in our downside scenarios but has been negatively impacted by unique factors including increased discounting, elevated depreciation expense primarily related to recent capacity projects in propulsion, and lower absorption across the enterprise due to lower production volumes. Now, we'll look at each reporting segment starting with our propulsion business. Sales in our propulsion segment were down 21% with lower production rates at OEM boat manufacturers resulting in fewer engine orders in the quarter, while repower shipments were slightly up versus Q2 2023. The high-margin controls rigging and props business had slightly lower sales but higher adjusted operating margins than prior quarter led by a strong aftermarket performance. Adjusted operating margins were below prior year, primarily due to the impact of lower net sales and higher manufacturing costs, including absorption for lower production, partly offset by the lapping of prior year unfavorable capitalized inventory variances and accelerated cost control measures. Our aftermarket-led engine parts and accessories business had a strong quarter with sales, margins and operating earnings up versus second quarter of 2023. With the transition to the Brownsburg, Indiana distribution facility now complete this business was able to service product to customers around the globe, leading to year-over-year sales increases in both the US and international markets. Navico Group reported a sales decrease of 8%, driven primarily by reduced sales to marine OEMs as they balance production levels to match retail ordering patterns partially offset by strong new product momentum and while slow, some improvement in RV sales trends. Segment adjusted operating earnings decreased as the impact from lower sales and increased discount activity was only partially offset by lower operating expenses. Finally, our Boat business delivered steady results despite planned softer wholesale orders as its channel partners continue to order cautiously, partially offset by the favorable impact of modest model-year pricing and share gains. The segment delivered adjusted operating margins within expectations as the impact of the net sales declines and lower absorption from the reduced production was partially offset by pricing and continued cost control. Freedom Boat Club, which is included in business acceleration had another solid quarter contributing approximately 10% of the Boat segment's revenue during the quarter while seeing very steady membership growth despite the macroeconomic uncertainty. We thought we would take a moment to remind investors how our shaping of the portfolio over the last 15 years has resulted in strikingly different financial performance despite a very similar retail boat market. 2010 was the last time when approximately 140,000 boat units were retailed in the United States. That year Brunswick had $3.4 billion of sales and lost more than $0.50 a share. Since that year, Brunswick has more than tripled the size of its aftermarket P&A business, divested non-core businesses and gained more than 1,000 basis points of share in outboard engines. Our Boat business is much healthier and leaner today than it was in 2010, as evidenced by this business being strongly profitable this year versus losing significant earnings in 2010 on similar global wholesale orders. Finally, we are keenly aware that our current guidance is slightly below the $6 downside case, we laid out several years ago. Although, we'd argue that we're still well within a reasonable margin over AIR for this type of exercise, the main components impacting the guidance are the reset of our P&A businesses after the post-COVID destocking and more cautious wholesale ordering patterns in all of our businesses despite elevated discount and promotional activity, which more than offset the better deleverage in our Boat business, larger market share gains by Mercury and benefits from cost efforts and higher share repurchases during the period. With the majority of the retail selling season behind us, it is evident that the 2024 US marine retail market is underperforming in peak season versus our initial expectations and is likely to end the year at unit level similar to 2010. The macroeconomic environment remains uncertain. And while there is now a higher probability of interest rate relief beginning in September, this would occur after the main selling season and will likely have an immaterial impact on our 2024 results but potentially provide a tailwind for 2025. In this environment, our OEM customers and channel partners continue to order cautiously and we do not foresee this pattern changing significantly through the remainder of this season. In these challenging conditions, our resilient recurring revenue businesses and channels including our engine parts and accessories, Freedom Boat Club and the aftermarket repower sales of propulsion and Navico Group are fully demonstrating their earnings and cash flow power. Through the balance of the year, we will continue to launch many exciting new products to support future share gains while focusing on delivering year-end inventory levels in line with historical norms, executing our strategic plan, investing in our long-term growth initiatives and expect to deliver resilient EPS and cash flow. The result is the following updated guidance to match these market realities including net sales of between $5.2 billion and $5.4 billion and adjusted diluted EPS in the range of $5 to $5.50 while keeping free cash flow guidance in excess of $350 million. 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, with only two items that have materially changed since our April call. First, we continue to moderate our capital expenditure spending for the year and now anticipate $175 million of CapEx spending for the year. This amount remains far in excess of maintenance capital levels and still allows our businesses to continue with their key growth initiatives. Second, furthering our balanced and flexible approach to our capital strategy, we have revised our plan to repurchase between $200 million and $220 million of shares in 2024, consistent with our initial assumptions for the year, and have completed $170 million through the second quarter. We plan to spend around $20 million each quarter going forward on share repurchases, balancing repurchases and debt reduction to gradually achieve our desired net leverage targets. I will now pass the call back over to Dave for concluding remarks.

I am excited to close our prepared remarks by highlighting some recently launched new products and other exciting developments. Flite continues to expand its product line with the introduction of the Ultra L2 e-foil, a lightweight and slim board designed for high maneuverability. During the quarter, we opened the order book for the award-winning Avator 75e and 110e electric outboards. The most powerful engines in the Avator family are well-suited for powering a variety of vessels, including pontoons, runabouts, and rigid-inflatables. Among 80 new or updated Brunswick Boat models launched so far in 2024, the all-new Sea Ray SPX 190 and SPX 190 Outboard models, featuring the new Sea Ray design language and many class-leading features, were introduced. Navico Group attended the world's largest fishing show, ICAST, and showcased several exciting new products from the Simrad and Lowrance brands, including the innovative new Recon electric-steer Trolling motor, which has been developed for both freshwater and saltwater anglers and features a unique joystick remote. In addition, the Lowrance brand also launched Eagle Eye, a highly accessible all-in-one live sonar solution, combining CHIRP & DownScan in one transducer, along with detailed CMAP charting. In the quarter, Brunswick brands won 11 top product awards from Boating Industry Magazine for the second consecutive year and, not to be outdone, Freedom Boat Club continued to expand geographically with the recently announced additional flagship locations in Copenhagen and near London. That is the end of our prepared remarks, we will now open the line for questions.

Thank you. Our first question comes from Fred Wightman with Wolfe Research. Please go ahead.

Hey, guys. Thanks for the question. I'm wondering if you could just give us maybe a high level update on how you're getting to that 10% retail number now? I know, that there's been some disconnect between what you've seen with your internal registrations and what we've seen from SSI, but just given sort of the state of the macro and what you've seen from the past month or two, what gives you confidence in the updated target?

Yes, Fred, it's Dave here. Over time, I believe our internal retail projections and SSI will align, though it typically takes a few months for that to happen. In Q1, our internal retail was about flat, slightly above the market. In Q2, we experienced a weaker May, declining approximately 8% to 10%, which we expected due to the multi-year transition occurring in June. We anticipated that the new models released in June would lead to an increase in retail, but that did not materialize, resulting in a June decline of around 20%, aligning closely with SSI. The difference with SSI involves some late-reporting states and those with our highest market share, particularly in the Midwest for our freshwater products. Currently, we are fairly aligned with SSI while noting these caveats. Could the market be down in the high single digits? Yes, that's a possibility. Given our current level of uncertainty, I believe that a decline of high single digits to 10% is a reasonable estimate. However, July is performing better than June, still down in the mid- to high single digits, but that could still result in something in the high single digits to 10% by year-end. By the end of July, we'll have covered 75% of retail, making it challenging to significantly shift that estimate afterward.

That makes sense. And thinking about the dealer inventory target for year-end, you guys talked about a 7% decline. I'm thinking at a high level, if you get there and you hit that target and you think about 2025, do you think 2025 is sort of retail and wholesaler in line? Do you think that there's restocking that needs to happen? How do you think about this setup?

I believe we're heading towards the end of the year with a cautious stance on inventory. By cautious, I mean we are at the lower end of what we anticipate will be needed for 2025. We can discuss 2025 later in the call. Overall, I feel that with our current inventory levels across different segments, we have mitigated any reasonable risks for 2025. When you examine the inventory levels across the various segments, they are well balanced. By year-end, many of our value aluminum products will be relatively low, while premium fiberglass will see a slight increase compared to last year, which is necessary since we were previously understocked and those segments are performing better. Therefore, I believe it's wise to remain somewhat conservative at this time.

Fair enough. Thank you.

Thank you. Our next question comes from the line of Michael Swartz with Truist Securities. Please go ahead.

Hey, guys. Good morning. Maybe just to start at high level broad brush strokes, is there any way to think about what may be the initial dealer volume commitments for your model year 2025 product looks like, at this time, this year versus last year? I know there's some differences in the timing of the model year changeover and probably when dealers are thinking about accepting more inventory. But just very high level, is there any way to think about what that looks like?

Yes. Hi. Mike, yes, at the moment more than 70% of our planned production for Q3 is accounted for with orders, which is relatively normal for us. So with brands like Boston Whaler, it's 100% accounted for. With some of the aluminum brands where we have smaller boats, all the way down to a few thousand dollar boats, that's pretty normal as well. So I think we're pretty comfortable with the position we're in for orders for the third quarter. We know less about Q4 at the moment.

Okay. And then just on the cost reduction program, I guess I'm trying to understand it seems like it equates to something in the $70 million to $80 million range. Just trying to understand, is that an annualized number? It sounds like that's just for 2024. And then, how much of that is actually variable, meaning how much of that would come back if and when production comes back?

Yes, I will address this. Good morning. By the end of the year, operating expenses are projected to decrease by approximately $100 million, likely ranging between $90 million and $100 million, which amounts to about 10%. A significant part of this reduction comes from compensation expenses, which will be notably low this year compared to our targets. We anticipate that this portion will return to normal levels at the beginning of 2025. Additionally, there are certain expenditures that are being postponed in 2024 that we would prefer to resume in 2025, assuming a more favorable market environment. However, it’s reasonable to say that roughly one-third of this reduction will be permanently removed for the foreseeable future and will only be reinstated, if at all, when market conditions allow us to invest more in growth.

I think the third is really for 2024 as well. So, the impact of that third on 2025 on a run rate basis would be higher.

Okay, great. Thanks a lot.

Thank you. Our next question is from the line of Matthew Boss with JPMorgan. Please go ahead.

Great. Thanks. So, Dave maybe could you elaborate on more recent trends that you're seeing in the marketplace? If you broke it down across premium versus the value channel? And just larger picture how best to anticipate the progression into 2025 if you looked back at prior cycles?

Certainly. We are observing that the premium segment remains stronger than the value segment. Additionally, fishing-related products, from high-end Boston Whaler saltwater boats to more affordable aluminum fishing options, are performing well overall. In contrast, general recreational products, such as value fiberglass runabouts and pontoon boats, are currently underperforming relative to the market. It's important to note that about two-thirds of our offerings are fishing-related, which positions us favorably given the ongoing strength in that segment. This suggests that consumers committed to boating, particularly for activities like fishing, are likely prioritizing their spending this year compared to those who may be more willing to cut back on certain activities.

Great. And then Ryan just as we think about industry recovery over time, what's the best EBIT flow-through rate or incremental margins to consider for 2025 just given reductions that you've made on the operating expense side?

Yes, that's a good question. I'll go ahead and address our views on 2025. The short answer is that we consistently believe we can achieve incremental growth of 20% or more. In fact, we've delevered this year at a similar pace; normalizing for absorption and discounting, the 27% year-to-date number would appear to align closely with around 20%, perhaps slightly below. To consider 2025 for us, it begins with the consumer. We are hopeful for slightly improved economic conditions, with a declining rate environment but still low employment and steady GDP. November may introduce some uncertainty, but we can navigate through it as we always do. This could lead to some stability in the marine market. We're likely to conclude the year with the main powerboat segment around 140,000 units, which is a 5% increase compared to the aftermath of the GFC, a more challenging macroeconomic period. While I'm not making a specific prediction for the 2025 market, I think it's reasonable to expect a flat market as a baseline, with potential for low or mid-single-digit growth, which would recover about half of this year's market loss and represent roughly 50% of what we consider a replacement level for the U.S. market. When considering wholesale and retail dynamics, which Dave mentioned earlier, in a flat market where wholesale matches retail, we could see about 1,500 boat units aligning with the corresponding engine units across the OEM landscape, where we continue to gain share at Mercury. While the market is a bit softer, we can count on continued market share gains. If retail next year increases slightly, we could reach a scenario where wholesale units exceed this year's figures by 10% or more. Looking specifically at Brunswick's dynamics, Mercury is still taking share with new products and there is ongoing stability and growth in Engine Parts & Accessories, which has been a concern for several quarters but is now demonstrating its value and growth even as new sales decline. I expect to see improvements at Navico, both in margins and sales, as we benefit from significant cost reduction measures, new product launches, and a potentially enhanced RV market, where Navico makes up about 10%. Additionally, the positive impact from operating expenses and our efforts to generate cash will support our capital strategy, including share repurchases and likely lower interest expenses through debt management. As we approach the end of the year, we will see where 2025 settles, but it seems there are more positive influences than challenges ahead for both the market and the elements that Brunswick can influence.

Great color. Best of luck.

Thank you. Our next question is from James Hardeman with Citi. Please go ahead.

Hey. Good morning, guys. Thanks for taking my call. I was kind of in and out in the early part of Q&A. You already answered this I apologize. But that the bridge on Slide 9 that 220 in market and pipeline correction, do you get any of that back in let's say for the sake of are you mean a flat market with one-to-one wholesale to retail. You're going to that 220 back? You talked about the 85 but I'm curious about that other big negative.

We do, James. In a flat market, you could expect to recover over 1500 along with the related benefits from the engines. If wholesale prices align with retail, it would benefit our boats and also involve our engines being installed on more than 48 percent of boats in the US, particularly with multiple engines. If retail prices rise slightly, wholesale could potentially exceed last year's figures by over 10 percent. Therefore, you can certainly reclaim a significant portion of that amount.

Got it. And then I mean you touched on this Ryan the notion that we're basically back at GFC levels of retail. And we still haven't seen a recession yet. I guess I could put a bullish or a bear spin on that. The bear spin would be that this is a market that's in a big time secular decline, right? That even in a relatively healthy macro environment obviously not for your industry, we've seen massive declines. I guess the barest view on that would be this is the work of the Fed and interest rates and everybody sort of underestimated just how interest-sensitive these purchases are. And once interest rates begin to come down we don't need to wait another decade for demand to sort of reflate. I'm curious your thoughts on big picture just obviously this retail has missed everybody's expectations by a good amount over the last couple of years. Thoughts on what you think this means going forward.

Yes, James. That's a good question. Studies looking at demographics through 2030 indicate that the wealthy are expected to continue accumulating wealth, which generally supports us as well as various other discretionary items. What we are currently observing includes a couple of factors. Firstly, as you noted, the interest rate environment, which indeed affects these purchases. However, there are additional layers to consider regarding interest rates, especially for some of our core consumers. It's not just about the higher costs of financing purchases; overall budgets are being squeezed more by ongoing inflation and interest rates on other financed purchases. Moreover, there is a confidence issue at play. Different factors are influencing discretionary purchases currently, beyond just the increased cost of financing. Over time, we believe that the cumulative effects of inflation will balance out. The past couple of years have seen relatively small increases, and we expect this trend to continue next year. Various factors are at work here, including cumulative inflation and the broader impacts of interest rates, which are proving to be larger barriers than we initially expected. However, I don't think there is any reason to expect a long-term negative trend. We always aim to outperform the market, and we have consistently done so, particularly in our engine segment and with some of our brands like Boston Whaler and Sea Ray, which have gained market share year-to-date and align with the trend of wealth accumulation.

I would also add James one stat that we look at pretty carefully participation across the industry and registered boats continue to be north of $10 million just in the U.S. alone. And then you have on top of that all the growth in the shared models, which were leading the way they're in Freedom. So I would caution taking new boat sales as the main metric on calling something secular when people are out there boating as much if not more than they have been in the past years. And I would say new product sales are softened for all the reasons Dave said. But participation remains strong. We don't see any cracks in that participation trend.

Got it. Thanks guys.

Thanks, James.

Thank you. Our next question is from the line of Megan Alexander with Morgan Stanley Investment Managers. Please go ahead.

Hi. Thanks so much for taking our question. I want to spend a little bit of time on the Propulsion segment in particular. So maybe the first question on the top line and then I'll ask a follow-up on the margin. So it does seem like the bulk of the reduction on the top line to the guide this year is coming from propulsion. I think if I'm doing the math right looking for declines in the back half kind of similar to what you saw in the first half. I was curious I think you said in the prepared remarks retail engine retail for the industry was down 6% in 2Q. Was wondering if you could let us know how Mercury compared to that? And then just maybe parse out in the updated guide from a top line perspective how should we think about kind of the impacts of lower retail than you expected and perhaps taking some units out of the channel in that segment?

Yes. The current impacts on propulsion are noticeable for a couple of reasons. Our market share has increased year-to-date, indicating that we are performing better than the overall market. We expect to continue gaining market share in Mercury throughout the year. A positive aspect in propulsion right now is that we have reduced production to align with lower-than-expected market conditions, and we acted quickly to make this adjustment. Additionally, there is a significant trend of destocking among our OEM customers. When we examine retail and wholesale across all segments of outboard production, they have returned to balance, which is encouraging for us. This means that any increase in retail will likely benefit Mercury directly. However, OEMs are hesitant to accept any products that they do not think will be used on boats in 2024. They are aware that we have production capacity available, which was not always the case, so they are opting to order smaller quantities more frequently to ensure they match their expected usage.

Yes, wholesale units for engines are expected to decline by about 20% this year, which is similar to the approximately 24% drop in boats. However, we anticipate that more of this will be evident in the second half of the year due to production schedules. The first half looks stable with sufficient inventory. As Dave mentioned, OEM orders have slowed down more quickly than we anticipated, and this is not due to them opting for other engine suppliers, but rather because production at our OEM partners experienced a rapid slowdown during the first couple of quarters. Therefore, in the latter half of the year, you will see a similar trend in propulsion as you do with boats, just a bit later on. Both segments started reducing wholesale orders in the middle of last year, and this trend has accelerated in propulsion. Although we don't track the engine pipeline as closely, we anticipate it will be lower than at the start of the year since we will be under-shipping retail, which positions us well for a strong start in 2025.

Thank you for the information. I have a follow-up on the margin line. You're indicating guidance for propulsion that seems significantly below 2019 levels, despite sales being strong. I understand the effect of production on this, but could you provide more details on the margin guidance? It seems to suggest a considerable decrease in the second half compared to what you've previously mentioned. Also, I remember that about nine months ago, you discussed a 20% margin for this segment. Is that still a realistic expectation in a more stable environment, or have recent changes affected that perspective?

That's a fair question. Let me answer in reverse by saying yes. Under normal production volume and market conditions, the propulsion business should be able to achieve operating margins at or above 20%. The decrease in margin this year is primarily due to reduced production volume, which has a significant absorption impact, costing over $30 million. There's also a negative effect from currency, particularly in the first half of the year. Unfortunately, we can't quickly offset the absorption losses, and we have larger depreciation this year due to the capacity projects and capital investments we made. This mismatch between depreciation and sales is an issue. We acknowledge that the situation is worse than we had expected, but if we normalize for absorption and one-time factors, the margins would still be in the mid- to upper teens at normalized volume. With a slight recovery in volume and a more favorable retail market, we can approach that 20% margin again.

Awesome. That’s super helpful. Thank you.

Thank you. Our next question is from the line of Xian Siew with BNP Paribas Asset Management. Please go ahead.

Hi, guys. Thanks for the question. I was just curious about your inventory target reduction for 7%. Do you think that's enough relative to retail down 10%? Because I don't think it implies much of a weeks on hand reduction?

Yes, Xian. Thank you for the question. We have several factors to consider when targeting retail. We take into account weeks on hand and units in the field. When we look at units per dealer, which we've discussed frequently, if we go too low, we won’t be able to offer a representative selection of our product line to most of our dealers. Therefore, we're trying to find a balance among various considerations. Focusing on one factor could lead to a different conclusion than focusing on another. However, we will significantly under ship retail this year but still expect to have a reasonable number of units at each dealer. The area where we will slightly increase inventory compared to last year is in the premium segment of our product offerings, particularly for Boston Whaler and Sea Ray. We have been recovering from difficulties in those products over the past few years due to challenges related to the supply chain crisis. Considering these aspects, we believe we are in a well-balanced position for managing risks in 2025.

Okay, I understand. That's really helpful. Regarding propulsion, the decline in wholesale volume seems to be aligned with new boat sales. Do you believe this segment is becoming more closely linked to new boat sales, or are there still some structural advantages in place? Additionally, pricing has been a significant factor. Is that currently under pressure, or are you managing to maintain it while just seeing a decline in volume?

Yes. No Xian, I'd say it's just volume. In fact, repower sales continue to be pretty strong during the first half of the year. We still think that that's about 15% of the overall 15% to 20%. But it's really just the OEM volumes that are sluggish, but we're not seeing any issues on the price volume mix. Obviously, 300-horsepower above where our share is extremely robust, it's where we can take the most price, because we're the only engine in town for anything kind of for 500, 600 and certainly we believe our all of our high horsepower products are best-in-class. So, we're still able to get a premium there and don't see that changing.

Okay. Thanks.

Thank you. Our next question is from the line of Craig Kennison with Baird. Please go ahead.

Hey good morning. Thanks for taking my questions as well. You mentioned floor plan interest costs for dealers. I'm just wondering, if there are metrics you can point to that would help us frame that additional expense, whether it's just the rate they face or the percentage of their gross profit today versus prior periods?

Yes, Craig, it's definitely a challenge. You can see the rate they're paying. With the advantage of having BAC, our dealers are paying a rate based on SOFR plus an additional percentage. This has increased several points since 2021, and you can calculate the average floor plan with that rate. Overall, I believe the dealer network continues to be very healthy. We receive reports every couple of weeks regarding the number of boats in the field that are older and any issues our dealers may have with paying for their floor plans or managing their sales. We're not observing any troubling trends. In fact, over the summer, aged inventory has decreased across all of BAC's portfolio. We're also experiencing strong liquidations of inventory older than a year. So, while you can calculate using SOFR and the changes in rates, the environment remains quite healthy overall.

Shifting focus, much of this discussion has revolved around the macro factors which are outside of your control. However, there appears to be an opportunity for improvement at Navico. I'm curious about the expectations for the margin profile of that business if we reach around 150,000 boats.

Yes I think you're right. And obviously we take that very seriously. Craig, and we're working on it very diligently, including in terms of the footprints. We closed about 40% of the facilities there. We've significantly reduced headcounts and we're working very diligently on cost of sales. So – but the cost of sales work that we're doing is not flowing quite yet because it's – because we still have inventory prior to some of those reductions. It will start to flow through along with a stream of new products some of which we highlighted today. So yes, we're doing all the right things on Navico Group. I wish it had flowed through a bit earlier. But obviously the marine OEM environment and the RV OEM environment is a tough one. However, aftermarket is doing better and making up for that which is why you see the kind of flat revenue by quarter. And we have some great new products coming through both on the OEM side and the aftermarket side.

Great. Thanks, Dave and Ryan.

Thank you.

Thank you. Ladies and gentlemen, this concludes our question-and-answer session. And at this time, I would like to turn the call back to Dave for some concluding remarks. Dave?

Thank you very much, and thank you all for joining us and for your questions. Although the peak season sales didn't meet our initial expectations, we came pretty close to our Q2 guidance. But it is clear that we are looking at a different back half of the year than we originally anticipated. I am very, very pleased though, with the way our market share is holding up but also particularly with the way that our recurring revenue businesses are holding up. P&A is performing very well, Mercury, Repower, Freedom Boat Club. We didn't even get a question on for once this time but it continues to grow memberships. It's grown about 3% in terms of memberships this year. So a lot of great performance there which is driving really robust earnings and very strong cash flow. So we're very excited about that part of the business. And we are clearly positioning ourselves very, very well for 2025. I do want to end by just saying that we continue to focus on being an employer of choice. We have a great team at Brunswick that's driving everything that you hear about. And we recently were ranked number one in the engineering and manufacturing category in Time's best midsized companies, which I think is a testament to how we run the business from a financial perspective, from a personnel perspective and from a corporate responsibility perspective. So I'm delighted with that I wanted to thank all of our employees. Thank you all very much.

Thank you. The conference of Brunswick Corporation has now concluded. Thank you for your participation. You may now disconnect your lines.