Brunswick Corp Q2 FY2025 Earnings Call

Good morning. Welcome to Brunswick Corporation's Second Quarter 2025 Earnings Conference Call. Today's meeting will be recorded. If you have any objections, you may disconnect at this time. I would like to introduce Stephen Weiland, Senior Vice President and Deputy CFO of Brunswick Corporation.

Good morning, and thank you for joining us. With me on the call this morning is David Foulkes, Brunswick's Chairman and CEO; and Ryan Gwillim, Brunswick's 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 Steve, and good morning everyone. Brunswick delivered strong second quarter results as the power of our market-leading products and brands, efficient operational execution and cost control, continued prudent pipeline inventory management, and the benefits from the resilient, recurring, aftermarket-focused portions of our portfolio resulted in second quarter financial performance ahead of expectations. This was despite the challenging macro environment and uncooperative weather in many parts of the U.S. through the first two months of the quarter. Year-to-date, boat unit retail sales in the value category are underperforming our initial expectations for the year, but continued overall resilience in the premium and core categories, combined with improving retail sales trends in July, is expected to provide a floor for wholesale performance in the second half of the year. Tariffs continue to directly impact our earnings and add uncertainty for both our end-consumers and channel partners, but all our businesses are executing strongly on their mitigation plans, resulting in a smaller net tariff impact than originally anticipated. Against this backdrop, we are pleased to report second quarter sales of $1.4 billion, up slightly from prior year, and earnings per share of $1.16, both exceeding the top end of our guidance and sequentially up from the first quarter. Earnings were impacted by the reinstatement of variable compensation and the effects of tariffs, but were consistent year-over-year excluding those items. A continuing highlight of our financial performance is our free cash flow. We had another quarter of outstanding free cash flow generation, with $288 million of free cash generated in the quarter, a record for any second quarter in company history. This performance also resulted in a record first half free cash flow of $244 million, a $279 million improvement versus first half 2024. The free cash generated in the past three quarters represents the largest free cash flow generation in any fourth through second quarter period in Brunswick history. In summary, despite everything going on around us, Brunswick was firing on all cylinders in the second quarter, but of course, Next Never Rests. And we are fully committed to doing a lot more, including progressing certain rationalization and manufacturing capacity optimization actions in the second half of the year to improve profitability and cash flow in several of our businesses, while still driving incremental product cost and operating expense reductions, and maximizing the positive impact of our cash generation on our capital strategy. Our overall results were supported by performance ahead of or in line with expectations for each of our segments. Our Propulsion business delivered strong year-over-year sales growth, with shipments to U.S. OEM customers outpacing expectations, resulting in sequentially improved earnings despite the anticipated tariff and absorption headwinds. Mercury's outboard engine lineup continues to take market share, gaining over 300 basis points of U.S. retail share in outboard engines over 300 horsepower in the quarter, and 30 basis points of share overall on a rolling 12-month basis, despite heavy wholesale shipments by competitors ahead of tariffs being implemented on Japanese imports. Mercury's leadership in high horsepower outboard engines will be further reinforced by the new 425 and 350 horsepower engines launched earlier this week with performance, smoothness, quietness, weight, and other attributes far ahead of the competition. Our Engine Parts and Accessories business had another strong quarter, with slight year-over-year sales growth and steady earnings despite a weather-affected start to the boating season. This primarily aftermarket-based business continues to derive its success from stable boating participation and the world's largest marine distribution network, which in the U.S. has gained 180 basis points of market share, resulting from our ability to support same-day or next-day deliveries to most locations in the world. Navico Group had slightly lower sales versus the second quarter of 2024, with aftermarket sales and sales to marine OEMs modestly lower. However, sales trends continued to improve each month in the quarter. Navico Group earnings remained consistent with first quarter levels and were driven by enthusiastic customer acceptance of new products and steady operational performance. Year-to-date revenue for Navico Group is only down 2.5% versus the first half of 2024, led by steady performance from the group's aftermarket businesses. Restructuring actions continue to gain traction despite tariff and market headwinds. And in the quarter, we consolidated two production locations and transferred European distribution to a 3PL. While in July, we implemented a leaner organizational restructure that will reduce expenses and increase agility. Our Boat business had lower overall sales, mainly resulting from weakness in value categories, but outperformed the market in some other key categories, resulting in overall market share gains, and has delivered 30 new model launches year-to-date. In response to the tighter value fiberglass market, we have rationalized our value fiberglass model lineup by 25% for the 2026 model year. Dealer inventories remain healthy, and Freedom Boat Club continues its journey of profitable growth, launching its first club in the Middle East located in Dubai, and with plans for additional expansion, further reinforcing its position as the world's largest and only global boat club. Now looking at external factors, we see some areas of continued uncertainty but also some emerging bright spots compared with the first quarter. Interest rates remain steady with the potential for improvement, and foreign exchange tailwinds should benefit our predominantly U.S.-based business. In addition, the One Big Beautiful Bill Act favorably addressed tax increases that were previously scheduled to take effect and restored key pro-business provisions such as full expensing of U.S. R&D. We are still analyzing the impact of all these changes on a global basis, but anticipate a significant positive cash flow impact moving forward. Brunswick continues to actively monitor and manage tariff exposure. Our coordinated team across trade compliance, supply chain, and finance analyzes the latest updates, implements mitigations, and continually refines our forecast. Despite recent tariff increases for some countries, overall we've revised down our estimate for total potential net exposure. Ryan will go into more detail, but I will again stress that despite the negative direct impact of tariffs on our earnings, given our primarily U.S.-based, vertically integrated engine and boat manufacturing base and predominantly domestic supply chain, and the fact that we manufacture almost all our boats for international markets within those markets, we remain competitively well positioned in an environment of persistent tariffs. In addition, our leading position and scale afford us the resources and sophistication to effectively manage this complex evolving situation, including through the deployment of AI tools. We see an improvement in longer-term dealer sentiment and inventory comfort, which is moving closer to historical norms. Boating participation remains strong with upticks throughout the quarter. Dealer foot traffic is stable, and we have seen a slight increase in people considering a boat purchase in the next 12 months. OEM production rates were up over the second half of last year. And while overall retail was down for the quarter, July is off to a strong start. We're using competitive incentives where appropriate to support second half sales and are continuing to invest in and derive benefits from the latest digital marketing technologies to generate more leads and optimize conversion. Overall, while we remain mindful of the dynamic macroeconomic backdrop and soft consumer sentiment, there are some reasons for cautious optimism as we progress through early Q3. Moving now to industry retail performance. Outboard engine industry retail units declined 6% in the quarter, with Mercury gaining 30 basis points of share on a rolling 12-month basis, and 140 basis points of share in the same timeframe on engines of 150 horsepower and greater. Mercury continues to gain share internationally, with 170 basis points of share gain in Canada over the past 12 months, and strength in high horsepower share continuing around the globe. As of the latest SSI reporting for May, U.S. main powerboat industry retail was down modestly year-to-date, with Brunswick's boat brands outperforming the industry. Since the beginning of June, internal Brunswick U.S. retail has improved, with registrations only down mid-single-digit percent over the same period in 2024. On a global basis, first half retail remained very steady for our premium brands including Boston Whaler, Sea Ray, Lund, and NAVAN, and, as a whole, for our core brands. Retail performance for our value brands continues to be challenged. And as noted, we are working to optimize the profitability of these brands at reduced production volumes. We have continued to diligently manage boat pipeline levels, and second quarter U.S. wholesale shipments were down 9%, resulting in an 11% reduction in U.S. pipelines, or over 1,200 fewer units versus last year. Global pipelines are down 2,300 units over the same period, reflecting our continued focus on maintaining the freshest inventory in the market. Lastly, as I indicated earlier, according to internal data, July retail for essentially all of our businesses has accelerated and is trending positive versus July 2024, giving us and our channel partners positive momentum to start the back half of the year. Before turning the call over to Ryan, I want to highlight the diligent efforts across our enterprise that resulted in record free cash flow, despite some inventory banking for tariff mitigation, and continue to support our investment-grade credit profile. Our strong Q1 cash performance continued into the second quarter. And in the first half of the year, we delivered $244 million of free cash flow, up $279 million versus the prior year. We've delivered $1.5 billion of free cash flow since 2021, and a record $522 million in the last three quarters, in very dynamic and challenging market conditions. Our balance sheet remains very healthy, with no debt maturities until 2029 and an attractive cost of debt and maturity profile. Given our continued strong cash performance, we are increasing our previous debt reduction guidance for 2025 by $50 million, to a total target of $175 million for the year. With this increase in our 2025 debt reduction target, by year-end we are on track to have retired $350 million of debt since 2023, and we remain on the path of returning to our long-term net leverage target of below 2x EBITDA. We are accomplishing this while maintaining significant financial flexibility, as evidenced by our commitment to our investment-grade credit rating. At quarter end, we'll have $1.3 billion in liquidity, including full access to our undrawn revolving credit facility. I want to thank the entire Brunswick team for their disciplined focus on execution, driving efficiencies, working capital management, optimization of capital expenditures, and many other actions that, together, allow us to return capital to shareholders, while maintaining financial flexibility and opportunistically reducing leverage. Our cash generation profile and investment-grade credit rating are important to our business and also differentiate Brunswick in our industry and sector. 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 solidly ahead of expectations. Sales were up slightly over second quarter 2024 as steady wholesale ordering by dealers and OEMs, together with modest pricing benefits, offset the impact of continued challenging consumer demand market conditions. Operating earnings and EPS were ahead of guided expectations, but down versus prior year as the impacts of tariffs, reinstated variable compensation and lower absorption from the decreased production levels were only partially offset by new product momentum, the benefits from the slight sales increase, and ongoing cost control measures throughout the enterprise. Lastly, as Dave mentioned earlier, it was a historic second quarter from a cash generation standpoint, with Brunswick generating a record $288 million of free cash flow. On a year-to-date basis, sales are down 5%, primarily due to anticipated lower production levels in our Propulsion and Boat businesses, only being partially offset by steady sales in our aftermarket-led Engine P&A and Navico businesses. Year-to-date adjusted operating earnings and EPS are also ahead of expectations, but below prior year as expected due to the same factors from the second quarter. Year-to-date free cash flow of $244 million is a first half record and is the result of focused inventory and other working capital initiatives started in the second quarter of 2024. Now we'll look at each reporting segment, starting with our Propulsion business, which reported a 7% increase in sales resulting primarily from strong orders from U.S. OEMs. Operating earnings were below prior year primarily due to the impact of tariffs, lower absorption from decreased production levels and the reinstatement of variable compensation, partially offset by cost control measures and the benefits from the increased sales. Propulsion segment sales and operating earnings both grew sequentially versus first quarter of 2025. Our aftermarket-led Engine Parts and Accessories business had another solid quarter, reporting a 1% increase in sales versus the same period last year due to slightly stronger distribution sales. Sales from the products business were down 4%, while the distribution business sales were up 4% compared to prior year. Segment operating earnings were slightly down versus second quarter 2024, due solely to the enterprise factors discussed earlier. Note that first half Engine P&A earnings and sales are essentially flat to 2024, despite the challenging marine retail market conditions and overall unseasonable weather for a significant portion of the early year. This performance reinforces our well-stated view that our continued focus and investment in this aftermarket, recurring revenue and earnings business is critical to driving stable financial and shareholder returns. Navico Group reported a sales decrease of 4% versus Q2 2024, with sales to both aftermarket channels and marine OEMs down modestly, partially offset by benefits from new product momentum. Segment operating earnings decreased due to the lower sales, tariffs, and the variable compensation reset. Finally, our Boat segment reported a sales decrease of 7% resulting from anticipated cautious wholesale ordering patterns by dealers, which was only partially offset by the favorable impact of modest model-year price increases. Freedom Boat Club had another strong quarter, contributing approximately 12% of the segment sales including the benefits from recent acquisitions. Segment operating earnings were within expectations as the impact of net sales declines and the variable compensation reset was partially offset by pricing and continued cost control. This slide shows an updated view of our 2025 tariff impact should the current tariff rates continue for the remainder of the year. This slide shows the approximate percentage of COGS affected by tariffs currently in force, along with our anticipated 2025 net tariff impact for each category after planned mitigation measures are considered. The largest tariff impact remains China, and while less than 5% of our COGS, could represent $20 million to $30 million of tariff expense at current rates for product and component importation into the U.S. These incremental tariffs are in addition to the approximately $30 million of Section 301 tariffs that were included in our initial guidance for the year. Mexico and Canada supply accounts for approximately 15% of U.S. COGS, but most of the supply from these two countries are imported under the USMCA, meaning that our tariff exposure here remains small, assuming the continued USMCA exemption. Finally, there are other smaller tariffs on rest of the world imports. Not included in this analysis are other impacts or potential impacts, both positive and negative to the enterprise, including possible retaliatory tariffs from the EU and Canada on U.S. manufactured boats and possibly engines and parts; tariffs on boats imported into the United States by our European OEM partners that use Mercury engines and parts; Mercury engine competitors which are paying tariffs on the importation of engines from Japan or other non-U.S. manufacturing locations; and maybe most importantly the continued disruption of the capital markets and the corresponding impact on our consumer. As everyone is aware, this is an extremely dynamic situation, and the entire Brunswick team is committed to minimizing the overall impact that tariffs ultimately have on our enterprise. My last slide shows our updated full-year guidance, taking into account the anticipated net tariff impact and continued market and consumer uncertainties, but also our strong operational performance and the recent market momentum. Despite a slightly softer marine market than initially anticipated to start the year, we remain confident in our ability to deliver our full-year plan, with the result being us holding the midpoint of our guidance with anticipated sales of approximately $5.2 billion and adjusted EPS of approximately $3.25. However, given our exceptional first half cash generation, we're raising our free cash flow guidance by $50 million to greater than $400 million for the full year. This will allow for increased debt reduction efforts, which we discussed earlier, and should enable us to repurchase no less than $80 million of shares at a time when we believe that our share price remains severely dislocated from our performance in a challenging market. As Dave mentioned earlier, retail conditions in July have improved from the early part of the season, giving us more confidence in steady wholesale for the remainder of the year, with Q3 expected to deliver sequentially slightly lower revenue and earnings driven by the annual seasonality of our businesses. I will now pass the call back over to Dave for concluding remarks.

Thanks, Ryan. As we wrap up, I want to highlight some of our recent exciting new product launches, announcements, and awards. Navico Group's Simrad brand recently launched AutoTrack technology for its HALO radar portfolio that enables automated tracking of multiple targets and provides unrivaled situational awareness to boaters. Our boat brands across the globe have been busy launching many new products, all featuring Mercury power and Navico Group technology. Our Harris Pontoons brand launched the 2026 Sunliner series, with a very stylish and contemporary new exterior and interior. The Sunliner is affordable but also aspirational with many thoughtful features, premium finishes and uncompromised quality. Our Rayglass brand in New Zealand unveiled the all-new Protector R Edition range, a bold evolution of its iconic, high-performance RIBs, leading with the 330 Targa R Edition, the first vessel in New Zealand powered by Mercury Racing's 400R V10 outboard engines. And Sea Ray launched its all-new SDX 230 lineup, available in sterndrive, outboard, and surf configurations, with the surf version featuring the innovative NextWave surf system designed to create consistent, rideable wakes for every skill level. The system integrates an exclusive Sea Ray interface with Mercury's Smart Tow system, Bravo Four S drive, and dual Simrad touchscreen displays offering easy control and visualization. Freedom Boat Club recently announced an exciting new franchise in Dubai, our first location in the attractive Middle East boating market. The flagship location will open this fall and feature many Brunswick boats, with additional locations to follow in 2026. At a time when several other smaller boat clubs are experiencing difficulties, Freedom continues to grow and thrive, globally supported by the ready availability of Brunswick's broad portfolio of boats and Mercury engines, rapid availability of P&A and accessories from our global P&A and distribution businesses, and a variety of financing, insurance, marketing, and IT services also provided by Brunswick. In return, Freedom generates substantial synergy sales while showcasing our exceptional products. And finally, Mercury reinforced its position as the industry leader in the high horsepower outboard market this week with the introduction of the new 425 horsepower and refreshed 350 horsepower outboard engines, delivering performance, smoothness, quietness and lightweight far ahead of the competition. During the quarter, we received significant recognition for our people, products and commitment to innovation, putting us well on track to surpass 100 awards again in 2025. Among the highlights, Brunswick was named by TIME Magazine as one of America's Best Mid-Size Companies for the second year in a row. We also earned six Boating Industry magazine Top Product Awards. These awards highlight the marine industry's best new and innovative products, and our awards underscore the breadth and depth of our innovation. On the topic of innovation, the Experiential Design Authority also honored us with an award for our impressive and engaging exhibit at CES 2025. For the third consecutive year, Newsweek named Brunswick one of America's Most Trustworthy Companies, placing us in the Top 10 within the Manufacturing and Industrial Equipment category, and we were recognized for the first time on Newsweek's lists of America's Greatest Workplaces for Parents and Greatest Workplaces for Women, reflecting our commitment to being an employer of choice. Congratulations to all those who've contributed to these awards. Finally, this quarter, we released our 2024 Sustainability Report, which describes our work to reduce our environmental impact while making our businesses more efficient and supporting the communities in which we live and work. That's the end of our prepared remarks. We'll now turn it back over to the operator for questions.

Our first question is from James Hardiman with Citigroup.

The tariff impact has decreased, resulting in around a $0.60 benefit compared to last time. The guidance remains the same. Should we understand that the ex-tariff guidance has decreased by approximately that amount? Moving forward, how should we assess the risk of upside versus downside based on the changes you've implemented?

James, it's Ryan. If you remember back to April, we projected a potential tariff net impact of $100 million to $125 million. When we applied that to the EPS bridge, we only accounted for $1, primarily for two reasons. First, we believed we could mitigate the impact better than expected, and we have indeed seen that. Second, at the time of our April earnings report, we were facing the highest tariff rates, with China at 145% and other countries also at very high levels. We were uncertain about the USMCA exemptions for Canada and Mexico. Overall, the dollar impact we included in the bridge hasn't changed significantly; it may be slightly lower on the margins, but in general, the outlook we had in April remains valid. While the tariff impact is expected to be lower than initially thought, that dollar amount still holds relevance. The market conditions have been somewhat softer than anticipated, although the premium core is sustaining well. So, I wouldn't characterize the rest of the business as being down by $0.50; that's not how we’re guiding. The year is shaping up similarly to our April expectations, with $3.25 remaining the midpoint as we balance the risks and opportunities.

Yes, James, it's Dave. I would add that given the dynamics around us, it is very difficult at the moment to take things to the bank. It's encouraging to see the trajectory in July, and we're very hopeful, but that is a 4- or 5-week trend. We just need to see a little bit more of that before I think we can flow it through.

Got it. That makes sense. As I consider the timing you've outlined, it seems we should anticipate a significant drop in Q3 earnings followed by a notable increase in Q4. If I remember correctly, Q3 was the major inventory reduction quarter last year, which would have made this year's comparison easier, assuming we aren't facing under shipments in Q3 again. So, is it fair to say that we will indeed face under shipments in Q3? Perhaps there was a shift in shipments between Q2 and Q3, as Q2 performed exceptionally well. How should we approach all of this?

Yes. It's pretty hard, James, to delineate between Q3 and Q4. I certainly wouldn't read much into it. Again, as Dave said, giving guidance in a dynamic environment like this is pretty challenging. I would say, as a reminder, production was down in the third quarter last year and then even more so in the fourth, both in Propulsion and in our Boat businesses. So there will be pickup there, goodness, if you would, in both. Wholesale shipments in both of those businesses, together with a very consistent P&A business, which obviously continues to perform extremely well in this environment. So no, I think we're looking at Q3, and I think we're off to a good start with July certainly. But I wouldn't read much into the difference between Q3 and Q4, although the production increase in Q4 versus Q4 of last year will be greater than the production increase in Q3. But again, there's a lot of timing impacts that go in there, and we're still thinking about a pretty strong second half of the year.

Our next question is from Xian Siew with BNP Paribas. We will move on to the next question, which is Craig Kennison with Baird.

I wanted to start with Navico. I guess big picture, when the market normalizes, whenever that is, and then your innovation pipeline matures, where should Navico revenue and profitability settle? It feels like that's a big needle mover when you think about some of the out-year earnings potential.

Yes, thank you for the question, Craig. I believe our long-term expectations for Navico Group remain in the low to mid-teens operating margin range, so we still have significant progress to make. With some favorable conditions, we anticipate top-line compound annual growth rates in the mid to high single digits. There is substantial potential in that business. We're doing excellent work refreshing our product lines, which are starting to regain market share even against strong competitors. We are very optimistic about this. Additionally, we're restructuring the business for optimization in a market that is smaller than we initially expected. As indicated in our release and slides, we are actively navigating through these challenges. All our businesses faced some headwinds this year, largely due to the reset of variable compensation, the lack of significant variable compensation last year, tariffs, and some absorption in the first half. However, if we account for those factors, I believe we're positioning Navico Group very well. I'm excited about the business's trajectory and the reception of our new products, most of which have been well-received in the market. Overall, I am enthusiastic about the future of this business, and I see it as a growth engine for us in the medium term.

Great. And Ryan, if I could ask you just on the tariff question. Slide 17 is super helpful as it relates to 2025, but it's been such a noisy environment that it's hard to get a feel for the true run rate. Have you done any work to look at '26, if like current policy persists, how we should think about the full year kind of run rate for tariff policy as it stands today?

Yes. Craig, obviously, we anticipated getting the question this morning. So we have played around with what '26 would look like. The answer is still pretty uncertain given all the variables. So not only are we paying the tariffs, right? You pay the cash tariffs, but it flows through the various financials in a different way, right? It goes on the balance sheet as an inventory cost and it flows out through the P&L over time. And then there's counteractions on duty drawback and substitution and benefit that we get to counteract those tariffs. So it's a big basket of things that we think about our supply chain team, trade compliance, finance. Everyone is kind of figuring out what the best course of action is and it changes, right, because the tariffs change every couple of weeks and then our response needs to change. I would say, as we sit here today, I don't see a huge change over next year. It's probably somewhere in the same magnitude. This year, we had a 10-month impact, right, but some of that was at higher rates. We also had some of the costs being hung up on the balance sheet by the end of the year. But next year, we'll have a little bit more duty drawback and some of the other financial benefits. So tough to tell. I don't think it will be greatly different from the 2026 impact, but I definitely need to get closer to the end of the year to really see what a run rate looks like. And certainly, we'll provide that guidance once we get to the January call. But certainly, I don't see a huge step change at this stage.

Yes. To add to that, we are actively working to onshore as much as possible right now. The rates are just one factor influencing the tariffs. There are also balance sheet implications to consider. Overall, our costs should decline significantly as we shift supply to the U.S., and we are making progress on this quickly, as evidenced by the reduction in our exposure this year. I want to emphasize that we are in a strong competitive position. The U.S. market is the largest marine market, and we are predominantly a domestic company with a substantial manufacturing presence and significant vertical integration. Despite the direct impact of tariffs, we believe our competitive standing is improving.

Our next question is from Noah Zatzkin with KeyBanc Capital Markets.

I guess, first, just on the decision to rationalize kind of the value fiberglass model lineup for 2026 by 25%. How should we think about maybe structurally the Boat Group, whether from a margin perspective or volume potential perspective given that rationalization?

Yes, thank you. Yes, good question. So really, the amount of complexity that you can tolerate in a product line depends on the volume. And with volumes reducing, we can tolerate less complexity. So we take out those models that are obviously selling less, and that's the kind of rationalization process. We want to leave ourselves with a good progression in the product portfolio, but not excess complexity. And that's really what we've been doing. There are other actions that we are taking that we'll be able to talk about a bit later in the year to further ensure that we have stronger profitability in that part of the market, but that's really the way to think about it, reducing complexity in a market that is smaller. I would say though, I think everybody understands this, that the profit contribution of all of our Brunswick boats, the Boat Group margin is only one component of it. All of those value boats have Mercury engines on them. A lot of them contain Navico Group technology. And so the margin stack, even in our value product lines, remains pretty good. And so we want to make sure that we are thoughtful as we approach this and that we consider the entire Brunswick margin impact.

Really helpful. Maybe just one more quick one. Any color on the tariff impact in the quarter? And then apologies if you already said this, but how should we think about maybe the distribution of that impact across segments at a high level?

Yes, I can address that, Noah. The situation is a bit different because the cash tariffs we paid are significantly higher than what appears in our profit and loss statement. The figure in the profit and loss statement is in the mid-teens for the quarter, in millions. However, there are various offsets and duty drawbacks that influence that figure. Approximately 75% to 80% of the tariff impact is related to the Mercury segment, primarily from Propulsion, with some contribution from Engine Parts and Accessories, while Navico accounts for the remainder and boats contribute a minimal amount. Additionally, we are closely monitoring the 15% tariffs on Japanese imports, as mentioned by Dave. We are the only U.S. engine manufacturer, with our main competitors largely based in Japan and very few manufacturing in the U.S. This is something we will keep an eye on, as it is not included in the current tariff figures. An advantage we see is the potential effect on Mercury sales and our capacity to continue gaining market share, as we believe our products are already leading in the market. This is simply another factor to consider in our cost analysis.

Our next question is from Tristan Thomas-Martin with BMO Capital Markets.

Did you update your full year industry retail assumption for boats?

No, I don't think we specifically did that. The trend we are seeing is solid performance in premium and core products, which account for 75% or more of our revenues, while the performance in the value segment of the market is down about 20%. I don't see a strong reason to change that profile, and I don't believe we've updated any numbers yet.

Okay. And then what are your channel inventory weeks on hand? And how are you expecting to manage that? Or what's your target by year-end?

Yes. So on the boat side, we are in the low-30s today weeks on hand. By the end of the year, it's going to be around 40, give or take. But really, remember that, that is looking at backwards-looking retail, so rolling 12 backwards. If you look at just pure units, right now, we are basically in the lowest inventory position we've been outside of COVID since the GFC. And by the end of the year, both global and U.S. field pipelines will be kind of at historical lows. So we're going to take out a couple of thousand or so boats in the U.S. and about that globally as well, maybe plus or minus depending on how the back of the year shapes up.

Just remember, this is all value stuff we're talking about here. Our pipelines and premium are lower than that.

Our next question is from Xian Siew with BNP Paribas.

On Propulsion, it was up 7%, including, I think, 11% outboard engines versus retail for outboard a bit down like 6%. And then I guess like what's kind of going on there? You mentioned kind of the OEMs pulling orders ahead of tariffs on the Japanese side. Are you kind of matching that? And should we kind of expect things to kind of moderate from here? Or is it just kind of the market share gains that are kind of offsetting, I guess, retail weakness?

We have a bit of pipeline on the engine side that we haven't discussed much. Over the last six quarters, we've significantly reduced our pipeline inventory for engines, approximately 25%, especially for high horsepower. During this time, some competitors have been increasing engine supply in the U.S., likely in anticipation of tariffs. Now, we're seeing our retail share gains align with OEM customers producing more than last year. Last June, many OEM partners were taking fewer engines due to stock on hand and a reduction in boat production, which did occur. Currently, with stable production and lower pipeline, they need engines, and we are meeting that demand. We have reviewed our OEM customers, and we're not losing market share among those who source from multiple suppliers. We intend to continue gaining retail share throughout the year, as we've done in previous years. It's a matter of managing the pipeline effectively, which is currently in a strong position, allowing us to increase engine supplies to ensure that wholesale outpaces retail in the upcoming quarters.

Okay, that’s very helpful. On that note, where do you see the pipeline for engines ending by the end of the year? Also, what are your thoughts on margin progression in propulsion moving forward?

Yes. By the end of the year, the pipeline will be down about 25% from the beginning of 2024, and it's down percentage-wise in the mid-30s for engines greater than 175. What happens next largely depends on the OEM patterns as we move towards 2026 and enter the next retail cycle. As of now, I don't foresee significant further reductions. I would say that the second half of this year is not expected to involve much more takeout. Thus, the reductions we've already made will likely remain in place, although a bit of that will depend on retail performance.

Our next question is from Stephen Grambling with Morgan Stanley.

You mentioned the initiatives to improve inventory and working capital. And I know you've talked about it a little bit on the call, but maybe you could just expand on what some of the initiatives are and how specifically investors should think about the impact of free cash flow conversion longer term, particularly if the retail cycle does start to turn here.

Yes, there is a lot of activity, especially regarding our supply chain, during this dynamic period. We have taken measures to manage our inventory effectively. This involves careful management of incoming supplies to ensure that our work-in-progress and overall inventory levels match our production needs. It’s a challenging task that requires close collaboration with our suppliers, and our team has done an excellent job in maintaining a healthy supply chain without overstocking. We believe there is still potential for improvement, and we are seeing positive results from our efforts. We have set clear short-term and long-term targets for our inventory levels. In fact, those levels have decreased by a couple of hundred million during the first half of the year. Ryan, do you have anything to add?

Yes. The significant reductions in production in the second half of last year and balancing the incoming inventory is really a helpful driver of that. And the businesses, as Dave said, have done a really nice job of ensuring the balance. And that will then move forward as we look at the second half financials and gives us a nice benefit because we will be producing and wholesaling more in boat and engines.

Our next question is from Joe Altobello with Raymond James.

Just go back to the engine commentary for a second. If we assume a 15% tariff on Japan, I would think the impact here is pretty straightforward, right? And that would obviously significantly improve your competitive positioning. So I guess, first, is that showing up yet in OEM orders? And second, is that baked into your outlook at all?

Joe, kind of, I guess, no and no really. Well, first of all, it's not baked explicitly into our outlook, although obviously, it's going to be helpful to us. It is not particularly showing up yet because of the amount of engines that were shipped in the second quarter, in particular. I don't think something like this was not a surprise. So I think that our competitors still have stock of pre-tariff engines. But obviously, over time, those will kind of bleed out. And we have not explicitly baked an uplift in Mercury share into our forecast at the moment. But obviously, it's going to give us good momentum.

Okay. Very helpful. And maybe secondly, you referred to certain rationalization and manufacturing capacity optimization efforts. Maybe could you elaborate on that? What businesses? It sounds like Navico and Boats are part of that, but maybe are there others as well?

Yes. We need to continue ensuring that we maintain good productivity and efficiency, while also aligning our overall capacity with our market expectations. We have been working on this, and I provided a few examples in the previous commentary, but there is still more to accomplish. We will likely be able to share more detailed updates in the third quarter call or possibly at some intermediate point. We are making progress on various initiatives that I believe will significantly reduce fixed costs in those businesses.

Our final question is from Jaime Katz with Morningstar.

So I'm curious about the second half projection for boat sales, and it implies basically that we're returning to growth. And I'm wondering if part of that is just mix from higher-priced boats or if you guys have seen interest or rising commitments from dealers that may help us see if we are at the trough.

Yes. Jamie, I think it's kind of two things. One, goodness in July has given us some momentum here as we get into the back half of the year, and we believe will continue to spur dealer orders. But certainly, the year-over-year comps versus the second half of last year really are a bit of a driving factor. We took substantial production out in the second half of '24 in order to keep inventory fresh and at the right levels. This year, just to match retail and wholesale, the wholesale will be stronger, right, in the second half. And so yes, premium and core, we plan on being up more than value, as Dave and I have said on the call. But really, if you go back and look at production rates, it's just matching wholesale and retail and the comparison versus an extremely light back half of '24.

Can we focus on value? There are some value products that are moving. Do you have any insight into what factors are driving those sales? Additionally, what should we look for to determine when those sales might return, aside from interest rates?

Yes, a couple of things. Obviously, there's just broader economic sensitivity in that buyer population if you like. So any uncertainties about inflation, employment, other things tend to be more acute in that population. It is an area where we see more financing at the point of sale. So more sensitivity to interest rates, certainly. I think we're doing a pretty good job in that segment, but it does require more promotions. You need to provide a reason for somebody to make that purchase. We try and do that by having the freshest inventory, the newest products and other things in the marketplace. But in the current environment, it also takes a bit of an economic push as well. So I think, hopefully, we'll begin to see some interest rate reductions in the back half of this year that will provide a bit more momentum. We'd hope to see something earlier in the year, but those didn't materialize. But I would say that those interest rate reductions are probably going to disproportionately benefit the buyers of value or entry-level products.

We have no further questions at this time. I would like to turn the conference back over to Dave for some concluding remarks.

Thanks for your questions, everyone. It was another solid quarter for Brunswick, with numerous new products and diligent operational work that drove our performance across all businesses and segments. A few highlights include our strong cash performance and a slight increase in revenue compared to the second quarter of 2024, which was encouraging to see. We're actively working to mitigate the impact of tariffs, and as mentioned earlier, our footprint and vertical integration give us a competitive edge amidst ongoing tariffs. We're also focused on actions to improve margins in our business, with specific strategies planned to achieve that. Although we're past the midpoint of the selling season, there's a sense that the market is poised for a rebound, especially with potential interest rate changes that could provide support later in the season. As we move into the second half, we're approaching it with cautious optimism. Thank you.

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