Brunswick - Q1 2024
April 25, 2024
Transcript
Operator (participant)
Good morning, and welcome to Brunswick Corporation's first quarter 2024 earnings conference call. All participants will be in listen-only mode until the question and answer period. Today's meeting will be recorded. If you have any objections, you may disconnect at this time. I would now like to introduce Neha Clark, Senior Vice President, Enterprise Finance, Brunswick Corporation. Thank you, and you may now begin.
Neha Clark (SVP of Enterprise Finance)
Good morning, and thank you for joining us. With me on the call this morning are Dave Foulkes, Brunswick CEO, and Ryan Gwillim, CFO. Before we begin with our prepared remarks, I would like to remind everyone that during this call, our comments will include certain forward-looking statements about future results. Please keep in mind that our actual results could differ materially from these expectations. For details on these factors to consider, please refer to our recent SEC filings and today's press release. All of these documents are available on our website at brunswick.com. During our presentation, we will be referring to certain Non-GAAP financial information. Reconciliations of GAAP to Non-GAAP financial measures are provided in the appendix to this presentation and the reconciliation sections of the unaudited consolidated financial statements accompanying today's results. I will now turn the call over to Dave.
Dave Foulkes (CEO)
Thanks, Neha, and good morning, everyone. Brunswick had a solid start to the year, delivering sales, margin, and adjusted earnings per share consistent with expectations, despite continued customer caution in the face of the economic uncertainty. Our performance benefited from continued market share gains, the wealth of recently launched and well-received new products, and comprehensive cost control measures across our businesses, offset by higher promotions and discounts on some product lines. We also continued to make good progress on our strategic initiatives. Our first quarter net sales of $1.4 billion and adjusted earnings per share of $0.35 were in line with our guidance range and consistent with the anticipated, restrained early season marine dealer OEM and retail wholesale order patterns, which drove reduced production rates across our product businesses compared to the first quarter of 2023 when pipelines were being filled.
Mercury Marine continued to capture market share, with first quarter U.S. outboard retail share up 200 basis points versus prior year. Our early season boat unit retail performance is tracking with our outlook of flat to 2023. As we move into the core 2024 retail selling season, we continue to work closely with our channel partners to maintain balanced current model field inventory levels, and we closed the first quarter with 36.1 weeks on hand in the U.S., which is in line with historical norms. In addition, during the quarter, we successfully completed a debt issuance of $400 million to cover the refinance of our only near-term debt, further solidifying our cash position and balance sheet. I'll now turn to some segment highlights for the quarter.
Our propulsion business delivered lower sales and earnings versus a record first quarter of 2023, as boat manufacturers and dealers moderated order patterns and managed production of current model year products and pipelines ahead of the annual model year changeover. We expect OEMs to remain cautious through the model year changeover as they assess consumer sentiment and monitor the macro environment. Mercury continued to outperform the market, gaining 330 basis points of U.S. outboard market share in engines 150 horsepower and above. Our engine parts and accessories business continued its steady performance, with sales and earnings down modestly from the first quarter of 2023, as anticipated, but increasing sequentially over the prior quarter.
Early season weather patterns have been supportive of boating in the Northern U.S., and with normalized inventory levels across the dealer network, continued strong boating participation should contribute to growth for the remainder of the year. As expected, Navico Group had lower sales and earnings versus the first quarter of 2023, but delivered sequential sales growth and consistent earnings versus the prior quarter. Navico Group continues to focus on investment in new products, including the recently launched Simrad NSX ULTRAWIDE multifunction display, which has been very well received by customers and is preparing for several important new product launches in the remainder of the year. Finally, our boat business performs to plan, with exceptional retail performance by Boston Whaler and Sea Ray at early season boat shows, while continuing to introduce new models to support market share gains.
Sales and earnings were below prior year, consistent with lower planned production levels, while operating margins improved sequentially. Freedom Boat Club continues to deliver steady membership sales, and same club sales in the quarter were mid-single-digit % above prior year. Freedom has now expanded to 413 worldwide locations. Shifting to external factors now. U.S. GDP and employment remain stronger than anticipated, slowing the recent pace of disinflation and, consequently, the likely cadence of Fed rate reductions, which in turn is keeping consumer loan rates high. We are, however, seeing a higher proportion of buyers with high credit scores financing their purchases than in recent prior periods. Interest in the recently launched Brunswick Retail Finance Program continues to increase, with more than 35% of Brunswick boat dealers having enrolled.
The marine industry is continuing to lobby against the proposed NOAA East Coast Vessel speed regulation and advocate for technology-based solutions. However, the exact contents of the proposed rule remain unknown, making an analysis of the impacts difficult. As noted, dealer sentiment is generally sequentially improving, but with appropriate inventory levels, they are carefully pacing wholesale orders, particularly for current model year value product lines. We are working with dealers to deploy a portfolio of targeted discounts and promotions. On a per unit basis, retail and wholesale program spending is in line with pre-pandemic levels, but floor plan support spending is higher. Our investments in digital platforms continue to drive benefits across our brands, with more than a third of Boat Group sales digitally assisted in the first quarter. Our surveys continue to show strong boating participation levels supportive of steady P&A demand.
Overall, boat show results were encouraging, with interested buyers, strong lead generation, and sales above prior year levels on a unit basis and with a richer product mix. Our Boston Whaler and Sea Ray businesses demonstrated exceptional retail performance at early boat shows, with new models supporting market share gains. Mercury Marine performed well at all major boat shows, recording the highest outboard share at Düsseldorf, Miami, and other key events. Shifting now to a global view of revenue in the quarter. Overall, we saw a 22% sales decline on a constant currency basis, excluding acquisitions. Moving now to U.S. retail performance. U.S. industry new boat unit sales in the quarter declined versus the first quarter of 2023. Brunswick internal retail data outperformed the overall market, with particular strength in our premium brands.
Our year-to-date global internal unit retail sales are flat to prior year, including a solid start in the first weeks of the second quarter. It is not uncommon to see differences in SSI reporting and internal data at this point in the season, and our expectation of a flat retail market for the full year currently remains unchanged. U.S. outboard engine industry retail units declined 9% in the first quarter versus prior year. Mercury continues to outperform the market with an overall share gain of 200 basis points in the quarter. We continue to successfully manage both pipelines, and we ended the quarter with U.S. inventory at 36.1 weeks, in line with expectations and historical norms, and with 13,500 units in the pipeline versus nearly 18,000 units in 2019. International boat pipelines were slightly higher, which is normally the case.
Notably, our first quarter U.S. boat pipelines declined versus the end of the fourth quarter of 2023, which is unusual, given the first quarter is commonly a period of building pipelines ahead of the selling season, underlining the caution being exhibited by our channel partners. I'll now turn the call over to Ryan to provide additional comments on our financial performance and outlook.
Ryan Gwillim (CFO)
Thanks, Dave, and good morning, everyone. Brunswick delivered a solid first quarter, consistent with guided expectations, despite a continued cautious macroeconomic environment. Versus a strong first quarter 2023, net sales in the quarter were down 22%, resulting in an adjusted EPS of $1.35. Gross margins have remained resilient. Adjusted operating expenses were down $11 million versus Q1 2023, and free cash flow performed better than anticipated, as CapEx spending continues to moderate, given the conclusion of several major capital projects in 2023. First quarter sales were below prior year as the impact of continued measured wholesale ordering patterns by dealers and OEMs, coupled with higher discounts in some business segments, was only partially offset by annual price increases, market share gains, and benefits from well-received new products.
Adjusted operating earnings were down versus prior year as a result of the impact of lower net sales, unfavorable changes in foreign exchange rates, and slightly higher input costs, which more than offset benefits from significant cost control measures throughout the enterprise. Now we'll take a look at each reporting segment, starting with our propulsion business. Sales and earnings were lower, as anticipated, as boat manufacturers and dealers moderated order patterns, managing production of current model year products and pipelines ahead of the retail season and model year change. However, Mercury continued to gain outboard engine share, as Dave discussed earlier, and together with the impacts of 2023 pricing gains and aggressive cost control measures, partially offset the impact of lower sales, unfavorable changes in foreign currency exchange rates, the lapping of prior year favorable variances related to timing of capitalized inventory, and lower absorption from reduced production.
The engine parts and accessories business continued its steady performance, with sales and earnings down modestly from the first quarter of 2023, as anticipated, but sequentially increasing over the prior quarter. Sales in the high-margin products business were down very slightly, while year-over-year distribution sales trends continued to improve. Segment operating earnings and margins decreased primarily due to the sales declines, which offset the impact of pricing and cost control. Note that our transition into the Brownsburg, Indiana, distribution facility is essentially complete, increasing our ability to service our international P&A customers in a more timely fashion. The result in the first quarter was growth in product sales in international regions, while sales into U.S. channels were slightly down, as dealers remained cautious on their inventory levels, which remained normalized during the off-season.
Navico Group reported a sales decrease of 24%, driven by reduced sales to marine OEMs as they moderate orders to control the pipeline of their current model year products, partially offset by strong new product momentum and improved RV sales trends. Segment operating earnings decreased from the impact of lower sales and increased discount activity, which is only partially offset by lower operating expenses. Finally, our boat business delivered sales and earnings in the quarter consistent with expectations, while continuing to ensure healthy pipeline inventory levels as we enter the prime retail selling season. Sales were down 26% versus Q1 2023 due to softer wholesale orders, as our channel partners continued to order cautiously ahead of the model year changeover, partially offset by the favorable impact of carryover pricing and share gains. Our premium brands continued to perform well at both wholesale and retail.
Adjusted operating earnings were down primarily due to the lower sales and lower absorption from the reduced production, partially offset by focused cost reduction activities. Freedom Boat Club, which is included in business acceleration, had another solid quarter, contributing approximately 9% of the boat segment's revenue during the quarter, while seeing very steady membership levels despite the macroeconomic uncertainty. Strong performance across our businesses allowed our first quarter performance to match expectations. Despite our year-to-date internal boat retail being flat to 2023, the continued economic uncertainty is resulting in cautious ordering patterns by our channel partners, making the rate and timing of wholesale acceleration and the balance of peak season wholesale sales between the second and the third quarters more difficult to predict.
Despite the challenging conditions, we remain focused on moving forward with our new product plans and growth initiatives and driving resilient EPS and cash flow while continuing to balance production to support retail sales and manage pipelines. As a result, we are not materially changing guidance as we enter the main selling season. Please see the appendix for additional guidance regarding anticipated segment metrics. I will wrap up the financial update by sharing certain updated P&L, cash flow, and other capital strategy assumptions for the full year. First, we increased our dividend by 5% in February and now anticipate a full year dividend of $1.68. Next, FX is trending more negative than our initial expectations, given the continued strength of the US dollar, and we now anticipate up to a $15 million negative earnings impact due to FX rates.
We hope to offset a portion of this impact with a slightly lower effective tax rate of approximately 22%. Lastly, as we continue to see near-term dislocation in our stock price and our cash generation remains strong, we anticipate spending approximately $250 million on share repurchases throughout the year, up $50 million from our initial estimate. I will now pass the call back over to Dave for concluding remarks.
Dave Foulkes (CEO)
Thanks, Ryan. We launched an extraordinary 25 new products across our businesses and brands during the quarter, representing an important contributor to near-term and future growth, and I'd like to highlight just a subset. At the Miami International Boat Show, we introduced some exciting additions to the Fliteboard product line. The Flite AIR and Flite AIR PRO are the most attainable models in the brand portfolio, and they enable us to expanding participation to a broader set of consumers, allowing significantly more people to enjoy the Fliteboarding experience. Mercury expanded its joystick control technology to a broader set of single-engine boat applications. Its joystick steering for single-engine vessels is compatible with the Mercury Verado family of V8, V10, and V12 outboard engines from 250 to 600 horsepower. Mercury also launched the fourth and fifth models in the expanding Avator electric outboard product line.
The 75e and 110e are the most powerful models introduced to date. We're also very excited about the many new boat models launched across our boat brands, including the new award-winning Boston Whaler 365 Conquest and Harris Crowne 250, which both debuted at first quarter boat shows and feature Mercury high-horsepower outboard engines and advanced Simrad electronics. We are seeing a very positive response to the recently launched Simrad NSX ULTRAWIDE, which is the industry's first full-functionality, high-definition, multifunction display, and showcases the seamless interface of the latest Simrad Android operating system. In addition, we launched the new Lowrance Eagle, which is the latest offering in the brand's entry-level Fishfinder chartplotter lineup and features improved clarity and depth performance through high-definition sonar....
And finally, we continue to expand our Boateka certified pre-owned boat business with the opening of the newest Tampa location, which is strategically located near Freedom Boat Club's largest corporate territories in Tampa Bay and Southwest Florida. Boateka's newest location will serve as a facility to accelerate certified pre-owned sales across the Southwest Florida region. Before we conclude, I'm thrilled to highlight the exceptional accomplishments of our teams from across the enterprise that were recognized with a record high number of awards in the first quarter. Brunswick was named to Forbes 2024 America's Best Large Employers list for the sixth consecutive year, and also named to Newsweek's list of the Most Trustworthy Companies in America for the second consecutive year. Brunswick Innovation also continues to be recognized, including with the Consumer Electronics Show Innovation Award for the Mercury Avator 20e and 35e electric outboard motors.
We received many awards for our products, innovation, customer service, and marketing at early season boat shows, including a record 16 total awards at the Miami Boat Show. Thank you again to all our talented Brunswick employees who make this recognition possible. That's the end of our prepared remarks. We'll now open the line for questions.
Operator (participant)
Thank you. We'll now be conducting a question and answer session. If you'd like to ask a question at this time, please press star one from your telephone keypad, and a confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to withdraw your question from the queue. For participants that are using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please, while we poll for questions. Thank you. Thank you. Our first question is from the line of James Hardiman with Citi. Please proceed with your questions.
James Hardiman (Director and Leisure and Travel Analyst)
Hey, good morning. Thanks for taking my questions. I wanted to dig in a little bit on the retail commentary, you know, favorite topic, trying to, trying to tease out the industry data versus what you think is right. So just so I'm clear, your internal boat data for Brunswick suggests that you guys are flat, but you don't think the industry is flat today. That's more a commentary of how you think the industry is gonna be for the year? Just wanted to make sure I understand that. And then I guess just more broadly, as I'm sure you're aware, you know, your biggest customer cut guidance for the second straight time today, and in particular, they seem to be surprised by the retail momentum so far this year. So just trying to connect those two dots.
You guys seem to think that retail is going very much as planned. They seem to be surprised by the weakness. So help us understand.
Dave Foulkes (CEO)
Yeah, thanks, James. Yeah, a couple of things, I guess. You're correct. Our internal retail is essentially flat for the year, including in the first couple of weeks of April. And you're right, there's often a dislocation at this time of year, in particular between SSI industry data, which I'm sure you saw is down about 10% in the main powerboat segment versus our internal retail. SSI suggests that industry is down 10 and Brunswick down about 5, so we would be dislocated by something like the 5% for Brunswick. I think because a couple of things. In the first quarter in particular, which is about 15%, I think of the total year, we're talking about relatively small numbers with a wider spread.
And then I think for the first quarter, there's a particular phenomena where I think SSI registrations, you would think would somewhat leak into the following months of the next quarter, but they would be compensated by leakage from the last month of the prior quarter. But in the first quarter, the leakage from Q4 of 2023 is very low because the sales are extremely low in Q4. So I think that the leakage tends to be more out into Q2 and less into Q1, versus the end of the prior year. So I think that's probably at least part of the phenomena. Of course, we can't say exactly what independently, what the total industry is doing. We think we are gaining some share, which we noted about 50 basis points.
But I think that's unlikely to fully account for the SSI to internal retail delta, and we expect, as usual, that the gap will close as we go forward.
James Hardiman (Director and Leisure and Travel Analyst)
Got it. Then the point on your biggest retailer, just sort of the disconnect. I would add, you know, a lot of retailers sound a lot more negative than you guys on the first three and a half months of the year. Any thoughts on what feels at least in terms of tone like a bit of a disconnect?
Dave Foulkes (CEO)
Yeah, obviously I can't, you know, speak for them, but I would say that we would probably both agree. I expect we'd agree that sales of our product, our premium product lines, which of course they're a big part of Sea Ray, Whaler, to some extent our Harris Pontoon brand, but mainly Sea Ray and Whaler. I don't know what they said about it, but, you know, sales of Sea Ray and Whaler have been strong. So if there is a weakness in other parts, I, you know, I don't know exactly what those parts are and how I might account for it. I would tell you, it's very clear that Sea Ray and Bayliner had a good Q1, as reflected in sales at Miami, for example, and Düsseldorf that we published.
James Hardiman (Director and Leisure and Travel Analyst)
Got it. And if I could just sneak in one more. Next month, six weeks are gonna be critical. What, what are you looking at most closely? I feel like us, as analysts, we become sort of weathermen this time of year. And for you guys in particular, given P&A business, the weather seems like it's critical. But, but maybe, you know, walk us through what you need to see or, don't wanna see in the context of your ability to, to hit the full year numbers.
Dave Foulkes (CEO)
Well, well, I mean, weather's there, but I don't think it's one of the major factors we're looking at, unless there's some, you know, extreme situation that's unanticipated. We'll be looking internally at order rates, which will be, for, for example, Mercury and Navico Group, which will be driven by production rates at mainly our OEM customers. To some extent, we'll be looking at order rates from retailers for P&A and other things, including for Navico. But really, yeah, the- I think as we go into the model year, right now, I think the industry overall is pretty healthy proportion of current model product. About, I think about 75% of product in inventories is current model year versus the prior model year, which is pretty decent.
But as you approach June the 1st and the model year changeover, obviously, this is a period where they'll be, you know, relatively trying to minimize additional current model year product. When we cross into June, we would hope and expect to see an acceleration, because they'll have to live with 25 model year product for the next year, obviously. In a very promotional environment, more promotional environment, as we see at the moment, obviously, the penalty of carrying prior model year product is higher than it would be in a less promotional environment because they're adding discounts to clear prior model year product once they go into June and beyond. So, you know, we would expect. We refer to this issue of trying to understand exactly when the point of inflection is going to be.
We would expect it to be a little bit more abrupt this year, maybe than in the past few years, just because the promotional environment really penalizes people for holding prior model year, current model year versus accelerating with new. But we'll be looking back to your question, we'll be looking at order rates from OEM customers, primarily.
James Hardiman (Director and Leisure and Travel Analyst)
That's really good, good color. Thanks, and good luck these next few weeks and months. Thanks, Dave.
Dave Foulkes (CEO)
Thank you very much, James.
Operator (participant)
The next question is from the line of Scott Stember with Roth MKM. Please proceed with your question.
Scott Stember (Managing Director and Senior Research Analyst)
Good morning, and thanks for taking my questions.
Dave Foulkes (CEO)
You're welcome.
Ryan Gwillim (CFO)
Morning, Scott.
Scott Stember (Managing Director and Senior Research Analyst)
Have you seen any change of, on the credit side, whether it's, the creditworthiness of customers coming in? And, have you seen any tightening at the retail side on a credit perspective?
Dave Foulkes (CEO)
We have seen people with high credit scores coming back into the market with financing a bit more than we saw in recent periods, I would say. So I would say, yeah, people with good credit scores are coming back and financing a little bit more than they were in prior periods. Credit tightening, I don't think there's any particular tightening at the moment. We're in a relatively stable period, I would say, and have been for the last, you know, probably six months, I would say, in terms of rates and credit score requirements.
Scott Stember (Managing Director and Senior Research Analyst)
Got it. And then over to on the parts side, it looks like sell-in was down 3%. Looks like the RV side is picking back up a little bit, but could you maybe talk about what you're seeing at POS, actual retail demand, what's being pulled through for both?
Dave Foulkes (CEO)
Yeah, I think the retail demand is still pretty solid. Obviously, our products business was down a little bit by 3%, but, you know, it's as close to flat as it's gonna be, probably. I think what we're seeing really on the P&A distribution business is a bit of a reflection of what we're seeing in all of our retail channels, which is people know the product is available, and so they're not inclined to build as much inventory at the moment. Obviously, they're watching their own balance sheets. So I just think that we're seeing the effect of ready availability on people's willingness to stock at the moment. I don't think there's anything probably more to it than that.
Ryan Gwillim (CFO)
No, the only thing I would point out also is our Brownsburg, Indiana, facility, is running at almost, you know, 100% capacity. It's, it's up and running, and, we have put behind us the kind of start-up periods, and that efficiency is allowing us to service all of our customers a little bit better, but certainly, our international customers are able to get product, quicker. Inventory levels in the channel seem to be quite normal, and so, you know, we would anticipate, given we're lapping periods of, of a little bit slower times at the end of last year, that the next three quarters for P&A should be, should be growth quarters.
Scott Stember (Managing Director and Senior Research Analyst)
Got it. And just, one quick last question. David, you talked about, I guess, model year changeovers. Can you maybe talk about the timing here? Obviously, when you have a lot of, maybe not you, but your competitors have 24 models in the pipeline, it kind of slows things down a little bit. What are you looking at from a timing perspective and maybe from a pricing perspective?
Dave Foulkes (CEO)
Yeah, I think, I mean, the model year changeover period, it can't be, we can't legally, if you like, or based on regulations, to introduce model year into commerce before the first of June. But often it's somewhere between the first of June and maybe into the end of July, depending on what the kind of prevailing environment is. But given the penalty of additional discounts for prior model year product at the moment, we'd expect most of our customers, and certainly we will be introducing new model year products on the earlier side of that, mainly in the first part of June. So, you know, we're now running in a period where it's just six weeks, mainly to the model year changeover.
So, so we would expect people to be cautious about building inventory in this period, and that's exactly what we're seeing. Sorry, what was the other part of your question, Scott? I missed it. I'm sorry.
Scott Stember (Managing Director and Senior Research Analyst)
Yeah, and just on, on general thoughts on pricing.
Dave Foulkes (CEO)
Oh, pricing. Yeah. Our pricing will be very modest this year, and we'd expect that across the industry.
Scott Stember (Managing Director and Senior Research Analyst)
Got it. All right. Thanks, guys. That's all I have.
Dave Foulkes (CEO)
Thank you.
Operator (participant)
The next question is from the line of Megan Alexander with Morgan Stanley. Please proceed with your questions.
Megan Alexander (Executive Director)
Yeah, thanks very much. Thanks for taking our question. Maybe just a quick follow-up on some of the questions that have been asked. In the slides, in the prepared remarks, I think you talked about doing some more targeted discounts and promotions, I think mainly mostly on higher floor plan support at this point. So two-part question: I guess, you know, is this just being absorbed somewhere else in the P&L at this point, given you didn't really change the guide around it? And then second point is, you know, given you can't really time the inflection of when retailers at theme start to order the 25s, I guess, why not be more aggressive, or maybe you are, with supporting dealers in terms of promotions at retail and pushing through these prior year models?
Or is it, you know, to Scott's question earlier, more a question of the competition at this point?
Dave Foulkes (CEO)
Yeah. So we, we definitely... I would say, if discounting is really when we say increased discounting, we're talking about versus prior year, primarily, as opposed to versus plan. The discount rates are, are pretty much as planned, but in terms of targeting, yeah, we certainly do support a kind of prior model year, moving prior model year product in the collaboration with our retail partners. But the, the other parts of targeting are really around model lines and segments that we target. Our premium product lines are not requiring a lot of discounting and promotional support at the moment.
It's not zero, but it's not particularly high versus some of the value product lines in fiberglass and some of the less, the less expensive, I guess, more value-orientated parts of our aluminum product line that require more support. Even kind of some of the pontoon product lines require more support. So it's really about which product lines and segments require support. The other thing that we're cognizant of, obviously, is some of our models will be significantly changed at model year, some less significantly changed at model year. So the ones that are being significantly changed, obviously, we would add more promotional support to move out the prior model year product. So those are more the kind of targeting things that we're talking about.
I think broadly, discounting promotion is not different to plan, just higher than prior year.
Megan Alexander (Executive Director)
Understood. Thank you. That's helpful. And maybe just one quick follow-up. You know, FX and incremental headwind, you know, nice to see that you think you'll be able to offset it with tax rate, and good to see the higher share repo. But you know, just given what's gone on with the Fed and the uncertainty, understanding it's early in the year, you know, was there any thought to lowering the full year guide, or maybe you can give us some context around how you thought about that?
Dave Foulkes (CEO)
No, not really. I think, you know, we gave ourselves some space in the guide at the beginning of the year. I think, you know, the $7-$8 is a pretty decent amount of space. If we thought that was under threat, obviously, we would have considered it, but we don't think it is at the moment. Yeah, certainly, there are some ups and downs, and I'm very pleased that we were able to cover even in Q1 the FX headwind. I think it's obviously, given the market today particularly, it's good to be in the market with more share repurchases. We're obviously buyback-biasing to the first half of the year on that, so no, no, no consideration of changing guide at the moment.
Megan Alexander (Executive Director)
Okay, great. Thank you so much.
Operator (participant)
Our next question is from the line of Craig Kennison with Baird. Please proceed with your question.
Craig Kennison (Director of Research Operations and Senior Research Analyst)
Yeah, thanks. She just asked my first question, so maybe I'll just pivot. Dave, you mentioned the Atlantic speed limit proposal, which has gotten a lot more attention lately among the analyst community, but you also mentioned, I think, a possible technology-based solution that might supplant a regulatory based solution. Just, I'm wondering, you know, do you have innovation in the pipeline, and could that be part of the solution? And do you think, you know, regulators might listen if you have that, that sort of pitch to offer?
Dave Foulkes (CEO)
Yeah, we, I think we've been very active in promoting existing and, you know, potential near future technological solutions. The proposed rule is really a huge overreach and completely ineffective way of approaching this. I think that it's basically a placebo, but you know, it is what it is. So I think, first of all, there's negligible evidence of a lot of boats 35 feet and above contributing to whale deaths in any significant numbers. We could trace one in the last 20 years, so of a whale with an ID. So this is really a, you know, it's complete overreach. If, if you really wanted to try and address this, then we have to combine boats and infrastructure, for example, with AIS systems or tracking or, sonar or vision systems.
There are a lot of ways to do this in a much more effective, way than is currently being proposed. Concerning the rule, we don't exactly know what the rule is. We know what some of the kind of drafts were, but, it's we don't see it until it gets published, if it gets published. And I would say the impacts are somewhat difficult to project. I think one of our analysts did an analysis based on 60,000 boats affected with a life of 20 years, which gives you a replacement of 3,000 boats, and then with our market share. But there are a couple of factors to consider here. One is that the proposed rule that we saw has the limits effective in the off-season, basically from November through April, which is mainly off-season for boats in that part of the market.
And the assumption would be that somebody would say a 37-foot boat wouldn't replace it with a 34-foot boat. So I think it's really difficult to project how this kind of plays out. But it's, you know, we're concerned about it really because of the precedent it might set, as opposed to the necessary specifics of this particular implementation. It's just a huge overreach.
Craig Kennison (Director of Research Operations and Senior Research Analyst)
That's helpful. Thanks, Dave.
Operator (participant)
Our next question is from the line of Mike Swartz with Truist Securities. Please proceed with your questions.
Mike Swartz (Director and Equity Research)
Hey, hey, good morning, guys. First question, I may have missed it, but did you say what global, either weeks on hand or pipelines were at the end of the quarter? And then, just as it pertains to the full year guidance, what are you assuming are either, you know, weeks on hand or pipelines by the end of the calendar year?
Dave Foulkes (CEO)
I think we weeks on hand at the end of calendar year in the 37-ish range.
Mike Swartz (Director and Equity Research)
Yeah.
Dave Foulkes (CEO)
About 37, yeah.
Mike Swartz (Director and Equity Research)
Yeah, down a couple of weeks-
Dave Foulkes (CEO)
Yeah
Mike Swartz (Director and Equity Research)
End of the year.
Dave Foulkes (CEO)
Mm-hmm.
Mike Swartz (Director and Equity Research)
Oh, so, so 37 by the end of the year?
Dave Foulkes (CEO)
Yes, that's right. It's 36 right now, and we expect about 37 by the end of the year.
Mike Swartz (Director and Equity Research)
Okay.
Dave Foulkes (CEO)
At least that is what we are planning our production around, I would say more, maybe more correctly at the moment.
Mike Swartz (Director and Equity Research)
Gotcha. And then just second question, we get a lot of feedback on this from people in the industry, but I guess, what are you doing to address affordability? I mean, I would assume there's things you can do around pricing, things you can do around content, but maybe at a high level, you know, what things are you addressing through affordability, maybe with your model year 25 product line?
Dave Foulkes (CEO)
Yeah, certainly. I mean, I think when you're thinking about making a boat affordable, there's lots we can influence in terms of base content. So, we might adjust base content. I think, you know, a couple of things. One is we offer, versus pretty much everybody else, the broadest possible product line. We have boats, as we said, that sell for $1,000, and boats sell for more than $1 million. So there are lots of ways to enter the market with us as it is. We can certainly control base content so that we make sure that we offer maybe a rung on the ladder that wasn't typically available. But there are broader considerations about resale value and other things that consumers are very aware of.
You certainly. There are certainly some boats that you just don't want to decontent. This is very similar to a car. If you want to sell it again after three years and it doesn't have some key piece of content on it, then the resale is going to be lower. And I think people are smart enough to know that to consider resale when they're buying something. So yeah, we have a broad product line. We'll certainly, in some cases, be adjusting some base content to maybe add a, you know, a rung on the ladder that wasn't there before. But really, the product line does a lot of the heavy lifting for us, I think.
Mike Swartz (Director and Equity Research)
Okay. Thanks, Dave.
Operator (participant)
Our next question is from the line of Matthew Boss with J.P. Morgan. Please just proceed with your question.
Matthew Boss (Equity Research Analyst)
Great, thanks. So Dave, just to follow up on wholesale, could you just elaborate on the visibility today that you have in the second quarter relative to the back half wholesale orders? And just maybe how best to think about the drivers behind the OEM caution that you cited today relative to the sequential wholesale improvement that's expected throughout the year?
Dave Foulkes (CEO)
Yeah, well, I think the drivers, as I mentioned earlier, really are retailers not wanting to hold more current model year inventory than they really have to to support sales before the changeover, which will, for most people, be in June, because they have to apply typically additional discounting or promotions of some kind to move prior model year product. So as soon as somebody is in the showroom of a dealer in June, and they're, you know, faced with a 2025 model year and a 2024 model year, on the floor, the dealer's typically gonna have to apply more promotional activity around the 2024 model year. So I think that's what's driving it.
I think also there's just general caution at the moment around, you know, how the consumer is gonna behave. Is there a difference in behavior versus recent experience? I think at the moment, we have, you know, we don't have a huge amount of insight into dealer orders in Q3 for our smaller product, particularly. For our larger product, like the premium, like the bigger, the bigger boats, the bigger Harris's, the Whalers, the Sea Rays, the orders are much more visible to us, and it takes a long time to build one of those boats anyway. So if you want it in June or in Q3, you're already ordering it, essentially, and we know that, you know, Q3 orders are already strong for those brands. So it really depends.
The visibility we have is less for value product and more for premium product, I would say.
Matthew Boss (Equity Research Analyst)
Great. And then maybe, Ryan, to follow up, just given the caution on overall first half wholesale orders, could you speak to how you're managing costs in the expense base to offset the related absorption headwind?
Ryan Gwillim (CFO)
Yeah, obviously, you know, our first quarter kind of speaks for itself, right? We took $11 billion of OpEx out versus the same quarter last year, and all of our business units played a part. It wasn't just one unit or corporate. So we have cost programs throughout the entire company, both to watch manageable costs, so things like spending on travel and things like that, but also making sure that we're keeping our gross margins as strong as possible, right? It's a two-part story. You can only take out so much OpEx at a time, but if you keep your gross margins stronger, that obviously plays a big role over time, and we've shown the resoluteness of those margins here over the last several quarters.
So we will continue to be very mindful of cost as we progress. But obviously, as new models come out with the model year and other new products come out, where product margins continue to grow, that will help the gross margin line as well. So all of that is kind of ingrained in everything we do today.
Matthew Boss (Equity Research Analyst)
Great. Best of luck.
Operator (participant)
Our next question is from the line of Fred Wightman with Wolfe Research. Please proceed with your question.
Fred Wightman (Director)
Hey, guys. I'm hoping we could just put some of the retail and wholesale discussions about the first half and the back half in the context with the 2Q guide that you put out there. So on the earnings, specifically, it looks like that's a little bit below the street, and you've talked about some of the difficulties predicting OEM build schedules. So if we look at that 2Q number today, is that sort of where you thought it would be at the start of the year, or are you assuming a little bit more back-half weighting, just given the fact that it sounds like people are holding off until model year 25 start to hit? How should we think about the cadence, I guess, versus where it was three months ago?
Dave Foulkes (CEO)
Yeah, that's Q2 is maybe a touch low. But if you look at the first half of the year, and you think we basically hit Q1, I think the street consensus with Q2 was, like, $2 or $3, and the middle of our guidance range is $1.95. So in the whole of the first half, we're $0.08 different. So it's really not a big delta here. But yes, for some of the factors that I just mentioned, I think we wanted to put a... We always want to put a range in there that is achievable in a range of potential scenarios. So that's what we were considering. Ryan?
Ryan Gwillim (CFO)
Yeah. Most of that $0.08 could be derived from FX.
Dave Foulkes (CEO)
That could be, yeah.
Ryan Gwillim (CFO)
I mean, that's. That is obviously playing a little bit bigger of a role.
Dave Foulkes (CEO)
Yeah.
Ryan Gwillim (CFO)
And just, we did have a comment earlier about tax rate versus FX. The FX impact is more negative than the tax rate. Goodness is positive.
Dave Foulkes (CEO)
Mm-hmm.
Ryan Gwillim (CFO)
So tax rate can play a little bit of a role, but in and of itself, won't get all the way there to cover FX, if it continues to be as strong a dollar as it has been, you know, the first 15 weeks.
Fred Wightman (Director)
That makes sense.
Dave Foulkes (CEO)
I think one other consideration here is, obviously, in the back half of 2023, that was a tough half. The fourth quarter, particularly when we were destocking heavily in the face of reduced orders from OEMs, provides us with a, you know, better confidence here.
Fred Wightman (Director)
That's fair. And, if we just shift to Freedom, is there you know, we've covered the sort of new boat retail environment a handful of ways so far this call, but if you think about Freedom, it doesn't sound like you're seeing any signs of churn or unusual cancellations. Is there anything that you can just sort of share as far as stickiness or maybe how that could potentially be an offset to some of these people who are delaying or deferring purchases, near term?
Dave Foulkes (CEO)
Yeah, I don't know about the very last part about the could be, I suppose, an offset. That's definitely possible. Churn is still in the kind of 10% range, which is where it's kind of been in recent history. I would say, obviously, Freedom continues to benefit from not having been subject to the cumulative inflation impact that that boats certainly have from a purchase perspective, and also not really subject to the higher rate environment, interest rate environment, because, nobody, as far as we know, a few people are kind of financing their entry fee. So, we think it's overall just a bit more kind of immune to the broader macroeconomic stuff that's impacting durable goods purchases.
Freedom continues to expand, and we were very pleased to see increases in kind of year-over-year same club sales. That's very satisfying. So, yeah, we, you know, the model is working very well and certainly helps our boat business, you know, pulling through additional units.
Fred Wightman (Director)
Thanks a lot.
Operator (participant)
The next question is from the line of Jamie Katz with Morningstar. Please proceed with your questions.
Jaime Katz (Senior Equity Analyst)
Hi, thanks for taking my question. I want to focus on Freedom Boat Club. I think the statement on the call was that same-store sales, or whatever metric was used, was up mid-single digits. And I'm curious if there's been a shift that you've seen from what would traditionally be buyers to maybe members in the club, and whether there's any way to discern that. And then, after that, is FBC still sort of slated to run at that mid-single-digit rate growth over the rest of the year? Thanks.
Dave Foulkes (CEO)
Yes. Thank you. Yeah, we're, we're delighted with the performance of Freedom, not just in the, in the domestic market, but also now in the European market, where there's a heavy presence in the Australian market. And you should expect to see us expanding to other, region, other geographies as well, since the model seems to be very robust in those areas. I don't know if I can tell you, we, we may have the data to track if recent members are kind of trading off buying a boat to going into Freedom. I don't have that data, but we could take a look at it to see if there's any particular trend in that regard.
I go back to the original data that we got when we were contemplating the acquisition of Freedom, and that was that very few Freedom members were contemplating buying a new boat. But one of the things that we do benefit from now is that Freedom has a concierge service so that anybody who's in Freedom and wants to buy a new boat is directed to one of our brands. So that's extremely helpful. Yeah, Freedom continues to grow, and we anticipate yeah, solid growth for the balance of the year. I can't remember the growth rate exactly that we're anticipating, but I don't know. Did we publish it? No. Okay. Yeah, we didn't publish the growth rate, but I, I think, yeah, we, we expect solid growth through the balance of the year.
Jaime Katz (Senior Equity Analyst)
Okay. And then, I know this was touched on earlier, but I'm assuming that the flattish market outlook is contingent on some internal look for interest rates. So do you care to share with us what your internal expectations for rate movements are over the remainder of the year? Thank you.
Dave Foulkes (CEO)
Yeah. I think, just like everybody else, they're changing with time. So yeah, I don't think we have any specific insights.
Ryan Gwillim (CFO)
No, and our call for a flattish market did not anticipate, you know, multiple interest... I think it is separate from the overall interest rate environment, so we would not tie those two together, on a one-for-one basis.
Dave Foulkes (CEO)
Maybe one thing to consider as well is that because of... I mean, some of the promotional activity is dealers buying down interest rates, or offering promotional rates. So there are many people who are financing their purchases and not financing it at the base rate. They may be financing it at 4.99% or 5.99% with a promotional financing rate.
Jaime Katz (Senior Equity Analyst)
Right. Thank you.
Operator (participant)
Our next question is from the line of Xian Siew with BNP Paribas. Please proceed with your question.
Xian Siew (VP)
Hi, guys. Thanks for the question. There's been some questions about, I guess, new boat sales, but I wanted to ask about engine retail, which was down, looks like 9% per the slide. You gained some shares, so maybe let's say you were down, I don't know, 6% or 7%. I guess, like, how does that track versus your expectations going into the year? Yeah.
Ryan Gwillim (CFO)
Yeah, I do. That's kind of in line with our initial expectations for the quarter. We are very confident in our ability to continue to outperform the market and take share, certainly in the 150 horsepower and greater categories. So we don't see that stopping. Retail obviously is gonna be a function, as Dave said earlier, on OEM production schedules and also a little bit of the repower channel, which continues to be strong, where we also take share. So that, you know, we're kind of performing as anticipated right now, and again, subject a bit to the OEM production schedule of our core consumers, continuing to take more share, even if the industry as a whole is slightly more sluggish.
Xian Siew (VP)
Okay, got it. And maybe also following up on that in propulsion, I think mix was a benefit last year as you were kind of restocking some of the higher horsepower engines. It sounds like maybe that continues a bit because you're kind of mentioning the higher horsepower again, or is it, or do we kind of see a more normalization of that mix effect?
Dave Foulkes (CEO)
Yeah, no, there's 2, 2 components to mix, right? There's the product component and then the customer component. I would say the product component continues to be a positive, as again, market share gains and high horsepower continue, and that premium product continues to be quite strong. And then consumer mix changes from quarter to quarter, depending on who is, who is buying it at wholesale. And at Q1, it was pretty neutral.
Xian Siew (VP)
Okay. Thank you.
Dave Foulkes (CEO)
You're welcome.
Operator (participant)
Thank you. Our next question is from the line of Joe Altobello with Raymond James. Please proceed with your questions.
Joe Altobello (Managing Director and Senior Analyst)
Thanks. Hey, guys. Good morning. So first question, maybe big picture. You know, you mentioned flattish U.S. marine industry this year. You know, Q1's down 10%, and I know the months do start to get more important over the spring and summer, but what's going to get retail to turn positive? And does pricing need to adjust to start to see unit growth again?
Dave Foulkes (CEO)
Hi, Joe. I think, does pricing need to adjust? I mean, I think at the moment, obviously, the transaction prices are quite different from, you know, whether it might be an MSRP or kind of recent historical pricing because of the promotion and discounting environment, particularly on value product lines. So, you know, one of the things that we do have now, that is an increasingly used capability, is the ability to do A/B testing in pretty localized portions of the market to see whether incremental promotional discounting activity will drive additional sales. So some places we see it well, some places, not necessarily so much. So I think that. I don't think at the moment, you know, transaction prices are broadly a big lever.
But, you know, they are certainly, the transaction prices are certainly improved by the discounting and promotional levels. In terms of what will drive the consumer some more, in addition to what we can offer, I think, obviously, a good weather in the season will be really helpful. It always is. But then a little bit more clarity in the macro environment, obviously, would be helpful too.
Joe Altobello (Managing Director and Senior Analyst)
Got it. Okay. And just to follow up on that, you anticipate shipping model year 25s a little earlier than normal. Any sense for when we might see competitive product in the channel? And could you guys have a bit of an advantage for a few weeks?
Dave Foulkes (CEO)
I think most people will be implementing model changeover relatively early this year. So I don't know that we'll get an advantage or not. I would say, though, that we continue to gain market share on the boat side. We talk a lot about the engine side, but just based on SSI, you know, we're up, you know, 50 basis points so far this year. So I think our new product investment is flowing through to a lot of, you know, really nice contemporary designs with a lot of really strong and unique and differentiated technology, which is really helping us overall, and that's what we will continue to do across our product lines, is make sure we have the most contemporary looking and best featured boats.
I think that is, you know, probably a bigger source of competitive advantage for us.
Joe Altobello (Managing Director and Senior Analyst)
Okay, great. Thank you.
Operator (participant)
Thank you. At this time, we've reached the end of our question and answer session. I'll hand the floor back to Dave for closing remarks.
Dave Foulkes (CEO)
All right. Thank you all very much for joining us, and for the great questions. As you saw, despite the challenges, retail is currently proceeding more or less in line with our expectations, and we delivered a very solid quarter. I think the resilience of our portfolio is very much on display. Gross margins held up really well, and our cost control discipline is on display as well. I think we, you know, we did a really nice job in the quarter, and we'll continue to do that. Field inventory levels remain extremely well balanced, so we don't have excess inventory, and we think we're really set up well for the balance of the year. Our free cash flow continues to be strong, and obviously, we did a really timely debt issuance, so that allows us to increase share repurchases at a time when...
You know, today, I'm pleased that we're going to be in the market with more share repurchases early in the year. We're going to bias that, obviously, to the first half of the year. So overall, I think a solid quarter and a very balanced view of the year ahead. Thank you.
Operator (participant)
Thank you. This will conclude today's conference. You may disconnect your lines at this time. Thank you for your participation. Have a wonderful day.