Earnings Call Transcript - BC Q3 2025

Operator, Operator

Good morning, and welcome to Brunswick Corporation's Third Quarter 2025 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 Stephen Weiland, Senior Vice President and Deputy CFO, Brunswick Corporation.

Stephen Weiland, Senior Vice President and Deputy CFO

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 the 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.

David Foulkes, Chairman and CEO

Thanks, Steve. Brunswick delivered strong third quarter results, with each reporting segment generating revenue growth over the prior year quarter and overall financial performance exceeding expectations and guidance for the quarter. The sales growth reflected strength across all our businesses despite a challenging, albeit improving macro environment and industry backdrop. Our market-leading propulsion and boat portfolios outperformed their respective markets, and our recurring revenue, parts and accessories and other aftermarket-focused businesses, along with Freedom Boat Club, continued to benefit from healthy boating activity. Brunswick's third quarter boat retail sales were flat year-over-year, a notable relative improvement from the first half of the year driven by resilience in our premium and core categories. We continue to drive forward with financial and operational efficiencies through the announced margin-accretive footprint actions in our boat business, continued enterprise-wide tariff mitigation initiatives, prudent pipeline management, and excellent capital strategy execution. Our third quarter sales of $1.4 billion were up 7% versus prior year. Our adjusted earnings per share of $0.97 were impacted by the reinstatement of variable compensation and tariffs, but were up year-over-year, excluding those items, and we had another quarter of outstanding free cash flow generation, providing us with the flexibility to simultaneously invest in our business, return capital to shareholders, and strengthen our balance sheet. With $111 million of free cash flow in the third quarter, we have generated $355 million year-to-date, an exceptional $348 million improvement over the first 3 quarters of last year. For the first time since the first quarter of 2022, revenue grew in all our segments. The Propulsion business delivered significant sales growth, with revenues in each of its three businesses: outboard, sterndrive, and controls, rigging, and propellers, up over prior year as OEM order strength continued later into the boating season. Mercury continues to be the clear U.S. outboard market share leader, with 49.4% share of outboard engines sold in the quarter. Given the volume of Mercury competitor engines shipped into the U.S. in advance of the tariffs on Japanese imports, we have not yet seen the full potential impacts of those tariffs on competitive product pricing, but we continue to be well positioned. Strong boater participation in our core markets continues to benefit our high-margin annuity Engine Parts and Accessories business, which posted strong sales growth over the prior year, with sales in both the products and distribution businesses up solidly and segment operating margin also up sequentially from the second quarter, reflecting the strong operating leverage in the business. In the U.S., our market-leading distribution business gained 140 basis points of market share year-to-date over the same period last year. Navico Group reported modest sales growth and steady adjusted operating margin over prior year. Growth was led by strong performance in marine electronics product lines, but continued to benefit from investments in technology and new product introductions. While strong boating participation drove aftermarket sales that represent 60% of Navico revenue. Continued restructuring actions, a leaner, more focused organization, and new product investments are bearing fruit. And Navico Group's strategic importance to the Brunswick portfolio was recently reinforced by the introduction of the Simrad AutoCaptain autonomous boating system, developed by Navico Group in collaboration with Mercury Marine and Brunswick Boat Group. Lastly, GAAP operating earnings were impacted by $323 million of non-cash intangible asset charges for Navico Group. These impairment charges reflect the impact of the current trade and economic environment despite our plans for continued growth and margin improvement in this important part of our portfolio that is an increasing source of integrated solutions and differentiated innovation. Our Boat business grew both revenue and adjusted operating margin over prior year as our premium brands continue to perform well, and our aluminum boat businesses delivered a very strong quarter. Dealer inventory remains historically low, and coupled with flat retail, allowed for steady wholesale shipments. In September, we announced the strategic rationalization of our fiberglass boat manufacturing footprint, exiting our facilities in Reynosa, Mexico and Flagler Beach, Florida by the middle of 2026 and consolidating production from these facilities into existing U.S. facilities. Moving on to external factors. The U.S. Fed cut the Fed funds rate by 25 basis points in September, with expectations for several additional cuts through the balance of 2025 and/or in early 2026. Lower interest rates have a compound benefit in reducing the cost of both dealer floor plan financing and consumer retail financing, which will be a tailwind for both wholesale stocking and the 2026 main selling season. Additionally, while we're still analyzing how best to take advantage of the tax provisions of the One Big Beautiful Bill Act, the cash flow benefits will most likely be realized in 2026. We continue to actively manage our tariff exposure in what is still a dynamic situation and are slightly increasing our estimate to approximately $75 million of net tariff impact for the year, mainly as a result of the expanded scope of Section 232 tariffs. I will again highlight that because of 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. We also stand to potentially benefit from the tariffs of our engine competitors who import their engines from Japan, now subject to a 15% tariff. Dealer sentiment remained stable with historically low and fresh dealer inventory, and boating participation has increased considerably during the third quarter, benefiting our aftermarket businesses and driving Freedom Boat Club trips up 2.5% year-to-date versus prior year. OEM build rates have remained solid, and in combination with lower inventories, have supported strong wholesale engine shipments. Retail incentives remain elevated compared to historic levels, but are lower than in the same period last year. Looking now at industry retail performance, which has steadily improved in recent months after the macroeconomic shocks from early spring. As of the latest SSI reporting for August, U.S. main powerboat industry retail was down a little more than 9% year-to-date, with Brunswick boat brands continuing to outperform the industry and Brunswick's internal retail performing better than SSI. Despite the U.S. outboard engine industry that is down slightly year-to-date, Mercury market share remained stable with a 49.4% share in the third quarter, even in the face of significant competitive promotional activity. Internationally, Mercury drove strong share gains in the majority of its markets. From a global boat retail perspective, our core and premium brands outperformed the market during the quarter, and our value brands performed steadily. Overall, Brunswick's boat retail was down mid-single digits in the first half of this year compared to prior year, while this quarter, overall, we came in flat to prior year, a significant relative improvement. While still down, we saw notable strengthening in our value segment as we took actions to streamline our model lineup and improve profitability through manufacturing consolidation, which we'll discuss on the next slide. Lastly, we continue to drive healthy and very lean dealer inventory pipeline levels. Global pipelines are down over 2,200 units compared to the third quarter of 2024 and down over 1,500 units sequentially from the last quarter. In the U.S., pipelines are down over 1,200 units compared to the third quarter of 2024 and down over 700 units sequentially from the last quarter. While the performance of our fiberglass value brands improved in the third quarter, this has remained our most challenged category. Last quarter, we reported that we streamlined our value fiberglass model lineup by 25% for the 2026 model year, which began in July. And in September, we announced a strategic consolidation of our Reynosa, Mexico and Flagler Beach, Florida facilities into existing U.S. locations. This consolidation will reduce fixed costs, drive improved profitability in our Boat segment, and generate a strong return on investment. The transition is expected to be complete in mid-2026, with some inefficiencies during the transition but with anticipated run rate savings of over $10 million a year after completion, even at current volumes, and with the benefits increasing when the industry rebounds and production volumes increase. This quarter, Brunswick has again delivered outstanding free cash flow. With $355 million year-to-date, we have delivered $1.6 billion of free cash flow since 2021 and a record $635 million over the last 12 months in very dynamic and challenging market conditions, with a significant contribution from the recurring revenue components of our portfolio, but also with diligent focus on working capital reduction, and we expect this strong performance to continue into the fourth quarter and next year. Our investment-grade balance sheet remains very healthy, with no debt maturities until 2029 and attractive cost of debt and maturity profile and net leverage that continues to improve. We are, therefore, again, increasing our debt reduction guidance for 2025 by $25 million to $200 million for the year, up $75 million since the beginning of the year. By year-end, we are on track to retire approximately $375 million of debt since the beginning of 2023 and are committed to achieving our long-term net leverage target of below 2x EBITDA. We are accomplishing this while maintaining significant financial flexibility. And at quarter end, we have $1.3 billion in liquidity, including full access to our undrawn revolving credit facility. We also anticipate retiring $200 million or more of debt next year while continuing to return capital to shareholders. I'll now turn the call over to Ryan to provide additional comments on our financial performance and outlook.

Ryan Gwillim, CFO

Thank you, Dave, and good morning, everyone. Brunswick's third quarter performance came in ahead of expectations, with sales growth in each of our segments versus the third quarter of 2024. On a consolidated basis, sales were up almost 7%, reflecting strong orders from OEMs and dealers, pricing actions taken in recent periods and steady boating participation driving P&A and other aftermarket business strength, which was helped by favorable late-season weather in many regions. Adjusted operating earnings and EPS also exceeded expectations, but were down versus the prior year due to the enterprise-wide impacts of tariffs and the reinstatement of variable compensation, which were partially offset by the positive earnings generated by the increased sales. Lastly, as Dave highlighted, we continue to drive robust free cash flow, up 166% from the prior year. On a year-to-date basis, sales are down 1%, primarily due to planned lower first half production levels in our Propulsion and Boat businesses, mostly offset by P&A and aftermarket stability throughout the year and third quarter sales growth in all of our businesses. Year-to-date adjusted operating earnings and EPS are also ahead of expectations but remained below the prior year as expected due to the previously mentioned enterprise factors and lower first half production. Year-to-date free cash flow of $355 million remains a continued strength of the entire enterprise, reflecting the overall steady performance of our higher-margin aftermarket businesses and our focused inventory and other working capital initiatives. As noted, while sales were up 7% this quarter versus the prior year, adjusted EPS was down $0.20. However, outside the impacts of tariffs and the variable compensation reinstatement, we would have shown strong adjusted earnings growth in the quarter. The aggregate third quarter EPS impact of reinstating variable compensation back to target levels and incremental tariffs was approximately $0.70. These costs were partially offset by the earnings benefits from the higher sales and positive absorption, primarily in our Propulsion business, along with lower discounts in our Boat business. Now we'll look at each reporting segment, starting with our Propulsion business, which grew sales by 10% in the quarter, reflecting increases for each of its product categories of outboards, sterndrive, and controls, rigging, and props. Mercury saw strong OEM orders in a low field inventory environment, together with continued robust market share, resulting in their second straight quarter of strong sales improvement. Operating margin was down compared to prior year due to tariffs and the variable compensation reset but benefited from improved absorption driven by higher production in the quarter. Healthy boater participation continues to drive strength in our Engine Parts and Accessories segment, with sales up 8% overall compared to the prior year. Sales were up solidly for both products and distribution, benefiting from favorable late-season weather in many regions, helping to make up for a slower start earlier in the year and market share gains in our distribution business. Operating earnings were down slightly compared to the prior year solely due to the enterprise impacts already discussed. I'm delighted to share that the Navico Group sales increased by 2% in the quarter, led by growth in its electronics portfolio, with adjusted operating margins decreasing only slightly as compared to the prior year. As Dave mentioned earlier, GAAP operating earnings were impacted by a $323 million non-cash intangible asset impairment charge for the Navico Group. As we have previously discussed, driving improved performance in this segment is a key focus for management and the entire Navico team. And while we still have more work to do, we are starting to see the benefits from these efforts and our investments in new products, as reflected in Navico's consistent sales and earnings performance throughout the year. As compared to the third quarter of last year, gross margins improved significantly as we took out almost $5 million of cost from Navico facilities and continue to execute a multiyear initiative to consolidate and optimize our global network of warehouses and distribution centers. This strategic program is designed to deliver meaningful improvements across customer experience, operational performance, and financial outcomes. We also continue to improve the balance sheet with lower inventory and increased turns. Lastly, our Boat segment reported sales growth of 4% over prior year, with growth in both boat sales and the business acceleration portfolio. Our aluminum boat brands, led by our premium fishing brand, Lund, had an especially strong quarter and drove strong top line and earnings performance. And Freedom Boat Club continued its growth journey, contributing approximately 13% of the segment sales. With low dealer pipelines, flat third quarter retail pulled through steady wholesale performance as we ended the quarter with lower pipeline inventories, as Dave discussed earlier. Segment adjusted operating earnings benefited from the increased sales, a lower discount environment, and focused cost actions, which resulted in greatly improved segment gross margin, which more than offset the enterprise factors and flowed through into a 65% increase in adjusted operating earnings compared to the prior year. My last slide shows our full year guidance, which remains unchanged for revenue of approximately $5.2 billion, adjusted operating margins of approximately 7%, and adjusted EPS of approximately $3.25. We remain comfortable with our full year EPS guidance despite the slightly increased estimated net tariff impact, as we believe we can carry forward our slight third quarter beat and continue to drive sales and earnings growth as we close out the year. Given our exceptional free cash flow generation year-to-date, we are increasing our full year free cash flow estimate to in excess of $425 million and our debt reduction target to $200 million, which will continue to progress our goal of lowering our debt leverage to under 2x. I will now pass the call back to Dave for concluding remarks.

David Foulkes, Chairman and CEO

Thanks, Ryan. I always like to highlight some of our exciting product launches, Freedom expansions, and awards. During the quarter, we enjoyed strong momentum at the European fall boat shows, which provides positive indicators for next year's retail season and reflect the strong market position of many of our brands. In addition to Mercury's strong showing at the Cannes and Genoa Boat Shows, two of our most recently launched boats earned notable awards, with the Bayliner C21 named the 2025 MoteurBoat of the Year in the very competitive under 7 meters category and the Sea Ray SDX270 Surf collecting the MoteurBoat Magazine Innovation Award. These two prestigious new accolades add to many previous product awards this year. Amongst the many new boat models introduced this year, during the quarter, Lund introduced its all-new Explorer model lineup, which combines Lund's legendary fishability with smart functional features. Powered by Mercury and equipped with Lowrance technology, the Explorer lineup is another embodiment of the power of Brunswick synergies. Lund continues to be the leader in the premium aluminum fishing market. Navico Group's integrated and connected solutions continue to drive OEM penetration, and the team worked with several large OEMs to introduce a full turnkey cloud and mobile app solution designed to enhance the boating experience. This end-to-end platform unlocks powerful information for OEMs and their dealers by using real-time telematic data to gather valuable insights to serve their customers. In addition, Lowrance launched the all-new Ghost X Trolling Motor in September as the next evolution in the Ghost lineup. Ghost X delivers 20% more thrust with ultra-quiet operations, GPS anchoring, and seamless sonar integration. FLITE debuted the FLITELab brand, which leverages the same innovative FLITE product design and technology to provide foilers with unmatched versatility to customize their ride. And finally, Freedom Boat Club recently reached 440 global locations and announced a new franchise location in Christchurch, New Zealand. Freedom continues to be a key contributor to Brunswick's growth, allowing more people to get on the water through its unique, convenient subscription-based boating model. This quarter, though, we took a genuine step forward into the future of boating with the official commercial launch of the Simrad AutoCaptain autonomous boating system. We have showcased development versions of this technology at some previous events but formally launched the production system at the International Boat Builders' Exhibition and Conference in Tampa a few weeks ago and conducted demo rides for the media and 9 OEMs. We have scheduled additional OEM demo rides at the Fort Lauderdale Boat Show next week. At launch, AutoCaptain offers fully autonomous and dynamic docking, undocking, and close quarter maneuvering, delivered with precision and reliability. The integrated sensor suite counters wind, waves, and currents, and with 360-degree awareness, recognizes and reacts to its surroundings, avoiding obstacles and hazards such as passing boats to safely execute maneuvers. Post launch, we are working on expanding the capabilities and features offered by AutoCaptain, with the intention that these additional features will be delivered via software upgrades. AutoCaptain reflects innovation only possible through the combined power and capabilities of our Navico Group, Mercury Marine, and Boat Group divisions working together to deliver this seamless integrated solution. It's also a milestone in representing the first commercialized solution under the Autonomy pillar of our ACES strategy, and the final pillar of ACES to be commercialized. Docking is routinely cited as one of the most stressful aspects of boating, and our comprehensive, capable, and intuitive system was reported by the media and OEMs who experienced it to be clearly the most advanced and capable system available. Before wrapping up, I'd like to share some preliminary thoughts on guidance for 2026, which I know is top of mind for many investors, especially given the multiple headwinds and tailwinds. While the trade and economic environment remains extremely dynamic, we believe that we are well positioned to benefit from any industry recovery due to the operating leverage inherent in our businesses. Our tariff mitigation strategies are working to reduce our net exposure, and we believe that our substantial vertically integrated U.S. manufacturing base positions us relatively well in an environment of persistent tariffs. Interest rates are coming down, with further cuts expected, reducing the cost of financing for both end consumers and dealers as we approach the fall boat show season and the restocking cycle for what we anticipate at the moment to be a modestly stronger 2026. This is a very early look subject to change. Embedded in these initial thoughts is the assumption of a U.S. retail boat market that is flat to slightly up versus 2025, driven by relative macroeconomic stability, no material negative changes in the tariff environment, and continued interest rate improvement. In this scenario, we believe that we can grow revenue by mid- to high single-digit percent, resulting in more than 25% growth in adjusted EPS, with continued significant free cash flow generation. That is the end of our prepared remarks. We'll now turn it back over to the operator for questions.

Operator, Operator

And the first question comes from the line of James Hardiman with Citi.

James Hardiman, Analyst

So over the course of the quarter, a major topic of discussion has been your perspective on retail and the trends reflected in the SSI numbers. I don't want to dive too deep into that, as we've covered it extensively before. However, could you provide some insight into our current position from a run rate standpoint, especially as we look ahead to 2026? If the expectation is for 2026 to be flat or show growth, where do we currently stand in relation to that? Additionally, how do you envision the steps we need to take to achieve a positive shift?

David Foulkes, Chairman and CEO

Thank you for the question. We faced some challenges in early Q2 due to tariff announcements and the resulting impacts on capital markets, which significantly affected that period. However, towards the end of Q2, we started to see some recovery and stabilization. Throughout this time, the premium and core segments of our product lines performed better than the value segments, and this trend continues. In Q3, we are seeing flat performance year-over-year, with premium and core still leading and value improving slightly but still lagging. Currently, we are in a season where sales are in the hundreds rather than the thousands, but we have observed some growth during the early weeks of October. At the end of last year, we mentioned that we expected the year to be weaker in the first half and stronger in the latter half. Although we were unaware of the tariffs then, this expectation has proven accurate. With interest rates improving and benefiting both our customers and dealers, giving them more confidence to stock inventory, we believe this momentum can carry into next season. Overall, we feel optimistic about the upcoming season, believing it should at least be flat and likely show some growth.

James Hardiman, Analyst

Got it. But just to clarify, as we think about sort of flattish for 3Q, that you guys, it seems like the more relevant number might be the industry. Do you think the industry is flattening out for 3Q? And then, I think just a quick follow-up. Yes, I'm sorry, go ahead.

David Foulkes, Chairman and CEO

Yes, I believe that's the answer. We usually have a process of reconciliation with SSI. SSI often underreports the Upper Midwest states initially, where we typically perform well due to strong brands like Lund, which is very prominent in the Upper Midwest. This leads to a need for reconciliation because of partial reporting. However, I have a feeling that, given our diverse range of brands across various sectors, our performance likely reflects a generally improving market.

Ryan Gwillim, CFO

In some of our premium areas, including Lund, we are likely gaining a bit of market share. By the end of the year, you might see that we outperform the industry by one or two points in certain regions where our share remains strong.

James Hardiman, Analyst

Got it. And then just the inventory question. It seems like you guys are encouraged with where you are. How do we think about sort of the wholesale to retail ratio into 2026? A lot of other industry participants are not only talking about maybe weaker trends, retail trends than what we're hearing today, but elevated retail level. How do you think about that heading into next year?

Ryan Gwillim, CFO

Yes, James, I mean, we have the benefit of having our joint venture with Wells Fargo, our BAC venture. And we get to see a lot of good inventory debt, and we're seeing pretty much what we're reporting, which is people being thoughtful about inventory levels not increasing. And certainly, as Brunswick inventory is about as low as it's been in any non-COVID year since the GFC. So we're going to end the year somewhere about 18,000 global units and probably below 12,000 in the U.S. And again, that is when you look at kind of on a per rooftop basis, that is about as low as we want to be to make sure we have representative samples of our products in the places we need to sell retail. So we're really comfortable with our own inventory. And frankly, I'm not seeing any heavy pockets outside of ours either.

David Foulkes, Chairman and CEO

Yes. Inventory freshness continues to be really good. More than 80% of our inventory is less than a year old, which is a very fresh and healthy level. And just on the outboard engine side, we have been undershipping retail for a long time now and feel like our outboard pipelines are in an extremely good shape.

Operator, Operator

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

Craig Kennison, Analyst

I just wanted to unpack the impact of U.S. tariffs on your competitors in Japan, especially on your engine franchise, of course. Have those competitors attempted to offset those tariffs with price increases? And have you heard from any boat OEMs that are interested in sourcing engines domestically?

David Foulkes, Chairman and CEO

Yes, I believe both are true. We are starting to hear about some price increases, but it's information we've gotten secondhand at this point. This is an evolving situation, and we expect to learn more soon. If any of our competitors plan to raise prices at the beginning of next year, we should hear about it in the coming weeks or within a month. It seems possible that some competitors are waiting to see how the Supreme Court addresses the challenge to the IEEPA tariffs before making any pricing decisions. Meanwhile, we continue to gain market share and convert original equipment manufacturers. In fact, over the past six months, we converted two European OEMs. Mercury maintains strong momentum, and our product pipeline is actively generating innovative and differentiated offerings that will enhance that momentum in the coming years. We are progressing rapidly with all Mercury product development, similar to our past efforts. Additionally, we can discuss innovations like AutoCaptain later, but the unique features that add significant value are exclusive to Mercury propulsion. Thus, there are numerous factors indicating that we should continue converting more OEMs over time.

Craig Kennison, Analyst

And Ryan, you mentioned cash flow and other benefits from the new tax policy. I'm just wondering if you can help us frame or quantify some of those key drivers a little better?

Ryan Gwillim, CFO

Yes, we have a lot of options with the new bill, especially regarding bonus depreciation and other factors. It requires a careful analysis of profit and loss versus cash flow to determine the best timing for leveraging these benefits. As you've seen, our free cash flow guidance for this year is exceptionally robust, expected to be among the highest in Brunswick's history at over 450 million. For the next year, our presentations indicate that a 125% free cash flow conversion suggests we'll be realizing some of these benefits, although we also face certain challenges. We're currently not making definitive decisions on how to take advantage of the bill's benefits. Much will depend on how the year concludes and our cash requirements at the beginning of 2026. However, it's evident that our capacity to generate cash and manage working capital has become a significant strength that sets us apart from other companies in our industry.

Operator, Operator

Our next question is from the line of Anna Glaessgen with B. Riley.

Anna Glaessgen, Analyst

I'd like to turn to Navico, shifting gears a little bit. Nice to see the top line inflection during the quarter. Understand operating earnings were impacted by tariffs and the variable comp. But could you confirm that excluding those items, you would have seen margin expansion? And if so, should we start to see more expansion as we roll over those or as we lap those headwinds towards mid-next year?

Ryan Gwillim, CFO

Yes. Yes, I can confirm that absent solely tariffs and variable comp reset, the Navico margins would have been up in the quarter.

Anna Glaessgen, Analyst

Got it.

David Foulkes, Chairman and CEO

Yes. And on the...

Anna Glaessgen, Analyst

Go ahead.

David Foulkes, Chairman and CEO

I just wanted to say that you go on.

Anna Glaessgen, Analyst

I was going to skip to the next question. So if you want to stay on this topic, please.

David Foulkes, Chairman and CEO

I wanted to mention that we don't often discuss technology during these calls, but we have made significant investments over the past three years. Looking at Navico, we achieved our strongest gross margins in the low 30s across the portfolio, yet we are heavily investing in new product development. We recently launched AutoCaptain, which took us 3.5 years to develop, and we also introduced Fathom along with a new connected platform that I just mentioned. Currently, none of our competitors have anything comparable. Our strategy is similar to what we did with Mercury, focusing on unique innovation that others can't replicate. While this requires upfront investment, we anticipate seeing the benefits as we progress. I wanted to provide that context.

Anna Glaessgen, Analyst

Got it. Thanks, Dave. Turning to both units, maybe asking the question in a different way. We've seen pretty notable outperformance year-to-date, with the industry running down high single digits. You guys are putting up a flat 3Q. Maybe expand upon the degree to which that outperformance is being driven by market share gains? And how we should expect you guys versus the market in 2026 and what's embedded in that guidance?

Ryan Gwillim, CFO

Sure. I'll take this, Anna. Yes, I think there's some share in there. I do think that, as Dave mentioned earlier, as the end of the year comes, you'll see SSI probably get closer to where we think the end of the year will be, which is kind of down mid-single digits, but with us probably outperforming a bit in premium and in core. As we look to next year, I don't know if we believe any of those trends are changing. Our pipelines in all 3 of our segments are down. So premium, core, and value pipelines are all down year-over-year as we enter 2026 with good, fresh inventory ready for the winter boat show season. I do think you could see some goodness on the value side, should we get a little interest rate help here in November, October 29, December, and February. So we have an opportunity for 3 rate reductions here really before the key part of the season. That could help value, but our premium customer continues to be very strong. And I think certainly looking forward to Fort Lauderdale Boat Show next week, where we anticipate a really nice show where our premium buyer should be out and looking to get a boat for the end of the year.

Operator, Operator

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

Xian Siew Hew Sam, Analyst

When you think about next year, I was wondering if you could expand a bit more about Propulsion. I think you kind of mentioned it like lapping a bit of a destocking. So I'm just curious how much do you think that could be a benefit? And how do we think about market share growth for Mercury over the next year?

David Foulkes, Chairman and CEO

Yes, I believe we are on a steady path of market share growth. We recently launched the new 350 and 425-horsepower engines in July and August. Typically, these kinds of introductions align with a model year changeover, which means we can expect some positive impact from these new products in the coming year along with continuous steady gains. We have discussed U.S. market share, which was nearly 50% this quarter. However, the momentum for Mercury is strong across all markets, with excellent performance in Asia, South America, and Europe. We foresee Mercury increasing its global share.

Ryan Gwillim, CFO

And maybe, Xian, let me just order of magnitude, some of these pipeline numbers for engines. And these are U.S. numbers, which is where we have the best information. But versus the first day of 2024, so a 2-year stack. By the end of this year, under 175-horsepower pipeline is going to be down about 25%. And if you go same time period over 175 horsepower, our pipeline is going to be down 33% since January 1, 2024. So we've put ourselves in a really nice position with our dealers and our OEMs to capture the upside on growth to the market rebound like we believe it will.

Xian Siew Hew Sam, Analyst

Yes, that's very helpful. Regarding the fourth quarter guidance, it appears to suggest a significant recovery in margins for both boats. However, I think the revenue projection suggests perhaps mid-single-digit growth. I'm trying to understand your perspective on boat margins and their progression in the fourth quarter and possibly beyond.

Ryan Gwillim, CFO

Yes. I think a bit of Q3, remember, is always saddled with some of the summer shutdowns and fewer production days. And so that often means Q3 is kind of the lowest margin quarter of the year. They're going to be producing kind of at a normal rate here in the fourth quarter. And if you remember, versus Q4 of last year, where they were really taking production days out to ensure a pipeline didn't inflate before the year, this year, they're simply just at a more steady state. So those are the two main drivers.

Operator, Operator

The next question comes from the line of Matthew Boss from JPMorgan.

Amanda Douglas, Analyst

It's Amanda Douglas on for Matt. So Dave, following the actions that you've taken to streamline the value boat segment, do you see the model lineup into 2026 as rightsized today? Or are there any further changes required ahead? And how would you assess dealer inventory levels across value and premium segments as we look ahead to the 2026 season?

David Foulkes, Chairman and CEO

Thank you for the question. Yes, I think the focus on value and kind of scaling back of the model lineup, I think we'll obviously evaluate through the balance of this season and early next season to see if we should take any additional actions. I think we still have a very comprehensive portfolio. But given volumes in that segment, we had too much complexity, and we need to take that down. I think we'll be very dynamic about it. I don't foresee a substantial additional change. At the moment, we've introduced new products, including the award-winning C21 from Bayliner this year, which is going to help us a lot, helps us focus our product development efforts to make sure that the model lineup that we do have is fresh. But of course, we could trim and make adjustments as we go forward. I don't see the same level of rationalization that I saw for this model year, though. And then in terms of inventory levels, I think we're healthy everywhere. Typically, our premium inventory levels in terms of weeks on hand are lower than kind of value. Typically, our premium inventory levels in terms of weeks on hand will be in the typically, mid-20s somewhere, and that's exactly where we are right now. So I really feel like our inventories are rightsized across all of our segments. And I believe that we're extremely well positioned for 2026.

Operator, Operator

Our next question is from the line of Jaime Katz with Morningstar.

Jaime Katz, Analyst

I just wanted to go back to Navico. I think in the prepared remarks, it was noted that there was more work to do. And you guys have done a ton of work already. So maybe, can you elaborate if there's been maybe some new issues found that need to be remedied? And then what does the roadmap look like to a steady state in that segment?

David Foulkes, Chairman and CEO

Thank you for the question. There are no new issues. There’s always more work to do, and we focus on prioritizing our actions to tackle the most significant and impactful tasks first. We continue to advance in all areas of the business. We must remember that Navico Group is more than just Navico. The Navico we acquired in 2021 represented about half of the business and continues to do so. It is the result of numerous acquisitions over time. We are making sure that those previous acquisitions are operating cohesively on the same IT platforms, for instance, ensuring that we eliminate excess distribution and consolidate it. We have aligned our systems to effectively manage our SIOP processes. This is a multiyear effort to extract optimal operational efficiency from the business. We have achieved a lot, but more work remains. There are still many initiatives outlined in our roadmap that will enhance our operating margins, drive revenue growth, and ultimately free up more cash. I believe there are opportunities for improved inventory turns that we haven’t fully realized yet. The roadmap includes all these elements, and it is thorough. Aine Denari, who currently oversees that business, is a detailed and capable operator systematically addressing all aspects, processes, and systems to ensure ongoing progress. Significant work, especially in product development, has been accomplished, and while it takes time for the results to materialize, we’re seeing momentum now with many differentiated products. We have streamlined several facilities, and earlier this year, we transitioned European distribution to a third-party logistics provider. Individually, these actions may seem small, but collectively, they can lead to substantial operating margin growth. We are not complacent with Navico. While it’s encouraging to see the business stabilize, there is immense potential, and we are eager to continue pushing forward.

Operator, Operator

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

Joseph Altobello, Analyst

Just wanted to get some more clarification on 2026 and the initial outlook here. So obviously, as you mentioned, you guys have been undershipping demand significantly on the engine side and I think a little bit on the boat side as well. But as we think about the mid- to high single-digit potential revenue growth for next year, how much of that is simply lapping that destock, if you will? And how much of that is actually potentially coming from a restock?

Ryan Gwillim, CFO

Sure, I’ll address that. It’s possible that the first part of the year may see some effects from a slower first quarter and possibly the first half of the second quarter. However, the growth will mainly come from a combination of market factors—though not heavily reliant on them—some pricing adjustments across different business units, and ongoing share gains, particularly at Mercury and in the Boat sector, as Navico Group regains share in various product lines. Additionally, we expect improvements in the discounting environment, which has already shown signs of recovery in the latter part of the year and is likely to continue. Parts and Accessories remain a consistent segment for us. Depending on your assumptions, you could see revenue growth ranging from mid- to high single digits. However, the impact of destocking is likely to be a minor factor, mainly relevant to the first quarter and the first four to five months.

Operator, Operator

Our next question comes from the line of David MacGregor with Longbow Research.

Joseph Nolan, Analyst

This is Joe Nolan on for David. You talked about the plant consolidation and efficiencies during the transition. Just wondering if you could talk about the fourth quarter impact and maybe give us a sense of what the net impact might be for 2026 from that?

David Foulkes, Chairman and CEO

Yes. So fourth quarter, we're probably talking about a couple of million?

Ryan Gwillim, CFO

That's right.

David Foulkes, Chairman and CEO

Yes, just checking with Ryan here to make sure I give you a couple of million. Essentially, we'll be operating 4 facilities and at least 2 at lower efficiency and productivity as we begin to exit them and we move towards fully consolidated by hopefully a little bit earlier than the middle of 2026. So by the time we get the transition completed, we'll begin to see that kind of annualized run rate saving of $10 million-ish-plus. So overall, I would say through next year, we'll see net positive, but it won't be the full $10 million of run rate savings. There are some elements of this transition that we can take ex items and some like just running at lower efficiency that we can and a little bit of a drag in the short term. But the price in the long term is well worth it. That $10 million or so run rate is just that current production rates. The benefit increases substantially as we move to higher production volumes. So we're anxious to get it done as fast as we can. We're very appreciative of the work of all the people who are transitioning and those who are working to help us with the transition. And yes, we'll be a much leaner production organization when we finish with a lot of benefits to the entire Boat Group.

Operator, Operator

Our next question is from the line of Tristan Thomas with BMO Capital Markets.

Tristan Thomas-Martin, Analyst

I just wanted to look maybe a little bit past next year, just maybe get an update on how you guys are thinking about normalized boat industry retail demand and kind of how long and what's needed to get us there?

David Foulkes, Chairman and CEO

In a normalized industry context, we experienced disruptions in the second quarter this year, which was unexpected. Without those disruptions, we might have seen a fairly flat year. The first quarter was challenging, and elevated interest rates have acted as a headwind in recent years, compared to the pre-COVID rates of 4% to 5%; we are currently seeing rates in the 7.5% to 8% range. This has been a consistent challenge for the last couple of years. Additionally, when we consider replacement rates and the number of registered boats relevant to our product lines—estimated at around $7 million—it suggests that annual replacements should be in the 200,000 to 250,000 range, which is significantly higher than the current figure of 130,000 to 135,000. Therefore, several factors indicate that macro conditions should boost sales over time, and while we anticipate this, we are cautious about incorporating all these factors into our near-term forecasts. Thus, we believe a flat to slightly upward projection is a wise estimate for next year.

Operator, Operator

Our final question today is from the line of Noah Zatzkin with KeyBanc Capital Markets.

Noah Zatzkin, Analyst

Maybe on the tariff front, I think the expectation ticked up a little bit to $75 million for this year. So just maybe any updates on how mitigation is going? And then any early thoughts on the expected impact embedded in kind of the initial thoughts around '26 would be helpful.

Ryan Gwillim, CFO

Sure, Noah, thanks for your question. The main change since our July call has been the impact from the tariffs on aluminum and steel. There are three key parts to this: the tariff rate increased from 25% to 50%, the list of applicable codes expanded significantly, which now includes any metal contact in incoming parts or goods, and it was applied retroactively, affecting inventory in free trade zones or bonded warehouses. This was the only change to our guidance. Our mitigation efforts have exceeded our expectations, and we have been performing better month after month, giving us good visibility for next year. However, it's difficult to determine the exact impact for the next year; I believe that the additional impact for next year will be much smaller compared to the transition from '24 to '25. As we become more adept at our mitigation strategies, we expect to reduce that number further. Overall, we are pleased to maintain our earnings per share for the year despite encountering an unexpected $10 million tariff impact, which we believe we can manage in the quarter as we prepare for '26.

Operator, Operator

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

David Foulkes, Chairman and CEO

Thank you for your questions, everyone. These are great questions. This quarter is very encouraging in many ways. We are seeing an improvement in retail, revenue growth across all our businesses, strong earnings, and continued exceptional free cash flow generation. As a team, we feel this is a significant turning point with a positive shift in momentum. We are also taking bold actions to reduce structural costs, which will enhance our earnings in 2026, regardless of market conditions. Our major brands and businesses are outperforming the market. We are heavily investing in highly regarded and award-winning new products throughout our portfolio. A standout feature is AutoCaptain, the first fully integrated autonomous boating system available, which sets us apart, along with several other platforms recently launched uniquely by Brunswick. This is very exciting. While many aspects of 2026 are typical, trends in late 2025, low inventory pipelines, and potential interest rate cuts indicate opportunities for revenue growth. Our strong operating leverage suggests significant margin expansion and earnings per share growth. Thank you all very much. Have a great day.

Operator, Operator

This concludes today's conference. You may disconnect your lines at this time. We thank you for your participation, and have a wonderful day.