Brunswick - Earnings Call - Q2 2025

Executive Summary

• Q2 2025 net sales were $1.447B and as-adjusted diluted EPS was $1.16, both ahead of internal guidance ranges; GAAP operating margin was 7.1% and adjusted operating margin was 8.7%.
• Results materially beat Wall Street consensus: revenue by ~$0.19B and EPS by ~$0.21; Q1 and Q4 also posted revenue/EPS beats, indicating sustained estimate outperformance and likely upward revisions to Q3/Q4 models*.
• Full-year guidance maintained at the midpoint: net sales ≈$5.2B and adjusted EPS ≈$3.25; free cash flow raised to >$400M; Q3 revenue guided to $1.1–$1.3B and adjusted EPS to $0.75–$0.90.
• Catalysts: Mercury’s new V10 425hp and enhanced 350hp Verado launches, ongoing share gains in high-horsepower outboards, and Freedom Boat Club’s Dubai expansion; tariff dynamics and OEM ordering patterns remain key narrative drivers.

What Went Well and What Went Wrong

What Went Well

• Propulsion segment sales +7% YoY with sequential earnings improvement; Mercury gained >300 bps share in >300hp engines and 30 bps overall on a rolling 12-month basis.
• Record cash generation: $288M free cash flow in Q2; first-half free cash flow $244M, up $279M YoY; YTD share repurchases of $43M.
• Recurring-revenue businesses (engine P&A, repower, Freedom Boat Club, Navico aftermarket) contributed nearly 60% of adjusted operating earnings, underpinning resilience.

What Went Wrong

• Adjusted operating margin compressed YoY (8.7% vs 12.5%) on reinstated variable compensation, lower absorption, and tariffs; GAAP operating earnings -35% YoY.
• Navico Group sales -4% YoY with adjusted operating margin down to 5.3% from 7.4%; market and tariff headwinds persisted despite product momentum.
• Boat segment sales -7% YoY on cautious wholesale ordering in value categories; margins compressed despite pricing actions; dependence on promotions in entry-level products continues.

Transcript

Speaker 3

Good morning. Welcome to Brunswick Corporation second quarter 2025 earnings conference call. All participants will be in a listen-only mode until the question and answer period. Today's meeting will be recorded. If you have any objections, you may disconnect at this time. I would like to introduce Stephen Weiland, Senior Vice President and Deputy CFO, Brunswick Corporation.

Speaker 6

Good morning and thank you for joining us. With me on the call this morning is David Foulkes, Brunswick's Chairman and CEO, and Ryan Gwillim, Brunswick's CFO. Before we begin with our prepared remarks, I would like to remind everyone that during this call our comments will include certain forward-looking statements about future results. Please keep in mind that our actual results could differ materially from these expectations. For details on these factors to consider, please refer to our recent SEC filings and today's press release. All of these documents are available on our website at brunswick.com. During our presentation we will be referring to certain non-GAAP financial information. Reconciliations of GAAP to non-GAAP financial measures are provided in the appendix to this presentation and the reconciliation sections of the unaudited consolidated financial statements accompanying today's results. I will now turn the call over to Dave.

Speaker 5

Thanks, Steve, and good morning, everyone. Brunswick delivered strong second quarter results as the power of our market-leading products and brands, efficient operational execution and cost control, continued prudent pipeline inventory management, and the benefits from the resilient recurring aftermarket-focused portions of our portfolio resulted in second quarter financial performance ahead of expectations. This is despite the challenging macro environment and uncooperative weather in many parts of the U.S. through the first two months of the quarter. Year to date, both unit retail sales in the value category are underperforming our initial expectations for the year, but continued overall resilience in the premium and core categories combined with improving retail sales trends in July is expected to provide a floor for wholesale performance in the second half of the year.

Tariffs continue to directly impact our earnings and add uncertainty for both our end consumers and channel partners, but all our businesses are executing strongly on their mitigation plans, resulting in a smaller net tariff impact than originally anticipated. Against this backdrop, we are pleased to report second quarter sales of $1.4 billion, up slightly from prior year, and earnings per share of $1.16, both exceeding the top end of our guidance and sequentially up from the first quarter. Earnings were impacted by the reinstatement of variable compensation and the effects of tariffs, but were consistent year over year excluding those items. A continuing highlight of our financial performance is our free cash flow. We had another quarter of outstanding free cash flow generation with $288 million of free cash generated in the quarter, a record for any second quarter in company history.

This performance also resulted in a record first half free cash flow of $244 million, a $279 million improvement versus first half 2023. The free cash generated in the past three quarters represents the largest free cash flow generation in any fourth through second quarter period in Brunswick history. In summary, despite everything going on around us, Brunswick was firing on all cylinders in the second quarter. Of course, next never rests and we are fully committed to doing a lot more, including progressing certain rationalization and manufacturing capacity optimization actions in the second half of the year to improve profitability and cash flow in several of our businesses while still driving incremental product cost and operating expense reductions and maximizing the positive impact of our cash generation on our capital strategy.

Our overall results were supported by performance ahead of or in line with expectations for each of our segments. Our propulsion business delivered strong year-over-year sales growth with shipments to U.S. OEM customers outpacing expectations, resulting in sequentially improved earnings. Despite the anticipated tariff and absorption headwinds, Mercury Marine's outboard engine lineup continues to take market share, gaining over 300 basis points of U.S. retail share in outboard engines over 300 horsepower in the quarter and 30 basis points of share overall on a rolling 12-month basis despite heavy wholesale shipments by competitors ahead of tariffs being implemented on Japanese imports. Mercury Marine's leadership in high-horsepower outboard engines will be further reinforced by the new 425 and 350 horsepower engines launched earlier this week, with performance, smoothness, quietness, weight, and other attributes far ahead of the competition.

Our engine parts and accessories business had another strong quarter with slight year-over-year sales growth and steady earnings despite a weather-affected start to the boating season. This primarily aftermarket-based business continues to derive its success from stable boating participation and the world's largest marine distribution network, which in the U.S. has gained 180 basis points of market share resulting from our ability to support same-day or next-day deliveries to most locations in the world. Navico Group had slightly lower sales versus the second quarter of 2024, with aftermarket sales and sales to marine OEMs modestly lower. However, sales trends continue to improve each month in the quarter. Navico Group earnings remained consistent with first quarter levels and were driven by enthusiastic customer acceptance of new products and steady operational performance year to date.

Revenue for Navico Group is only down 2.5% versus the first half of 2024, led by steady performance from the group's aftermarket businesses. Restructuring actions continue to gain traction despite tariff and market headwinds, and in the quarter we consolidated two production locations and transferred European distribution to a 3PL, while in July we implemented a leaner organizational structure that will reduce expenses and increase agility. Our boat business had lower overall sales, mainly resulting from weakness in value categories, but outperformed the market in some other key categories, resulting in overall market share gains, and has delivered 30 new model launches year to date. In response to the tighter value fiberglass market, we have rationalized our value fiberglass model lineup by 25% for the 2026 model year.

Dealer inventories remain healthy and Freedom Boat Club continues its journey of profitable growth, launching its first club in the Middle East located in Dubai and with plans for additional expansion, further reinforcing its position as the world's largest and only global boat club. Now looking at external factors, we see some areas of continued uncertainty but also some emerging bright spots compared with the first quarter. Interest rates remain steady with the potential for improvement, and foreign exchange tailwinds should benefit our predominantly U.S.-based business. In addition, the One Big Beautiful Bill Act favorably addressed tax increases that were previously scheduled to take effect and restored key pro-business provisions such as full expensing of U.S. R&D. We are still analyzing the impact of all these changes on a global basis, but anticipate a significant positive cash flow impact moving forward. Brunswick continues to actively monitor and manage tariff exposure.

Our coordinated team across trade compliance, supply chain, and finance analyzes the latest updates, implements mitigations, and continually refines our forecast. Despite recent tariff increases for some countries, overall we've revised down our estimate for total potential net exposure. Ryan will go into more detail, but I will again stress that despite the negative direct impact of tariffs on our earnings, given our primarily U.S.-based vertically integrated engine and boat manufacturing base and predominantly domestic supply chain, and the fact that we manufacture almost all our boats for international markets within those markets, we remain competitively well positioned in an environment of persistent tariffs. In addition, our leading position in scale affords us the resources and sophistication to effectively manage this complex, evolving situation, including through the deployment of AI tools. We see an improvement in longer-term dealer sentiment and inventory comfort, which is moving closer to historical norms.

Voting participation remains strong, with upticks throughout the quarter. Dealer foot traffic is stable, and we have seen a slight increase in people considering a boat purchase in the next 12 months. OEM production rates were up over the second half of last year, and while overall retail was down for the quarter, July is off to a strong start. We're using competitive incentives where appropriate to support second-half sales and are continuing to invest in and derive benefits from the latest digital marketing technologies to generate more leads and optimize conversion overall. While we remain mindful of the dynamic macroeconomic backdrop and soft consumer sentiment, there are some reasons for cautious optimism.

Speaker 2

We progress through early Q3.

Speaker 5

Moving now to industry retail performance, outboard engine industry retail units declined 6% in the quarter, with Mercury gaining 30 basis points of share on a rolling 12-month basis and 140 basis points of share in the same time frame on engines 150 horsepower and greater. Mercury continues to gain share internationally, with 170 basis points of share gain in Canada over the past 12 months and strength in high-horsepower share continuing around the globe. As of the latest SSI reporting for May, U.S. main powerboat industry retail was down modestly year to date, with Brunswick's boat brands outperforming the industry since the beginning of June. Internal Brunswick U.S. retail has improved, with registrations only down mid-single-digit % over the same period in 2024.

On a global basis, first half retail remained very steady for our premium brands including Boston Whaler, Sea Ray, Lund, and Navan, and as a whole for our core brands. Retail performance for our value brands continues to be challenged, and as noted, we're working to optimize the profitability of these brands at reduced production volumes. We have continued to diligently manage both pipeline levels, and second quarter U.S. wholesale shipments were down 9%, resulting in an 11% reduction in U.S. pipelines, or over 1,200 fewer units versus last year. Global pipelines are down 2,300 units over the same period, reflecting our continued focus on maintaining the freshest inventory in the market. Lastly, as I indicated earlier, according to internal data, July retail for essentially all our businesses has accelerated and is trending positive versus July 2024, giving us and our channel partners positive momentum to start.

Speaker 2

The back half of the year.

Speaker 5

Before turning the call over to Ryan, I want to highlight the diligent efforts across our enterprise that resulted in record free cash flow despite some inventory banking for tariff mitigation and continue to support our investment-grade credit profile. Our strong Q1 cash performance continued into the second quarter, and in the first half of the year we delivered $244 million of free cash flow, up $279 million versus the prior year. We've delivered $1.5 billion of free cash flow since 2021 and a record $500 million in the last three quarters in very dynamic and challenging market conditions. Our balance sheet remains very healthy with no debt maturities until 2029 and an attractive cost of debt and maturity profile. Given our continued strong cash performance, we're increasing our previous debt reduction guidance for 2025 by $50 million to a total target of $175 million for the year.

With this increase in our 2025 debt reduction target, by year end we are on track to have retired $350 million of debt since 2023. We remain on the path of returning to our long-term net leverage target of below 2 times EBITDA. We are accomplishing this while maintaining significant financial flexibility as evidenced by and commitment to our investment-grade credit rating. At quarter end, we'll have $1.3 billion in liquidity including full access to our undrawn revolving credit facility. I want to thank the entire Brunswick team for their disciplined focus on execution, driving efficiencies, working capital management, optimization of capital expenditures, and many other actions that together allow us to return capital to shareholders while maintaining financial flexibility and opportunistically reducing leverage. Our cash generation profile and investment-grade credit rating are important to our business and also differentiate Brunswick in our industry and sector.

I'll now turn the call over to Ryan to provide additional comments on our financial performance and outlook.

Speaker 2

Thanks Dave and good morning everyone. Brunswick's second quarter results were solidly ahead of expectations. Sales were up slightly over second quarter 2024 as steady wholesale ordering by dealers and OEMs together with modest pricing benefits offset the impact of continued challenging consumer demand market conditions. Operating earnings and EPS were ahead of guided expectations but down versus prior year as the impacts of tariffs reinstated, variable compensation, and lower absorption from decreased production levels were only partially offset by new product momentum, the benefits from the slight sales increase, and ongoing cost control measures throughout the enterprise. Lastly, as Dave mentioned earlier, it was a historic second quarter from a cash generation standpoint with Brunswick generating a record $288 million of free cash flow.

On.

a year to date basis, sales are down 5% primarily due to anticipated lower production levels in our propulsion and boat businesses, only being partially offset by steady sales in our aftermarket, LED engine P&A, and Navico businesses year to date. Adjusted operating earnings and EPS are also ahead of expectations but below prior year as expected due to the same factors from the second quarter year to date. Free cash flow of $244 million is a first half record and is the result of focused inventory and other working capital initiatives started in the second quarter of 2024. Now we'll look at each reporting segment, starting with our propulsion business, which reported a 7% increase in sales resulting primarily from strong orders from U.S. OEMs.

Operating earnings were below prior year primarily due to the impact of tariffs, lower absorption from decreased production levels, and the reinstatement of variable compensation, partially offset by cost control measures and the benefits from the increased sales. Propulsion segment sales and operating earnings both grew sequentially versus first quarter of 2024. Our aftermarket LED engine parts and accessories business had another solid quarter, reporting a 1% increase in sales versus the same period last year due to slightly stronger distribution sales. Sales from the products business were down 4%, while the distribution business sales were up 4% compared to prior year. Segment operating earnings were slightly down versus second quarter 2024 due solely to the enterprise factor discussed earlier.

Note that first half engine P&A earnings and sales are essentially flat to 2024 despite the challenging marine retail market conditions and overall unseasonable weather for a significant portion of the early year. This performance reinforces our well-stated view that our continued focus and investment in this aftermarket recurring revenue and earnings business is critical to driving stable financial and shareholder returns. Navico Group reported a sales decrease of 4% versus Q2 of 2024, with sales to both aftermarket channels and marine OEMs down modestly, partially offset by benefits from new product momentum. Segment operating earnings decreased due to the lower sales, tariffs, and the variable compensation reset. Finally, our boat segment reported a sales decrease of 7% resulting from anticipated cautious wholesale ordering patterns by dealers, which was only partially offset by the favorable impact of modest model year price increases.

Freedom Boat Club had another strong quarter, contributing approximately 12% of the segment sales, including the benefits from recent acquisitions. Segment operating earnings were within expectations as the impact of net sales declines and the variable compensation reset was partially offset by pricing and continued cost control. This slide shows an updated view of our 2025 tariff impact should the current tariff rates continue for the remainder of the year. This slide shows the approximate percentage of COGS affected by tariffs currently in force, along with our anticipated 2025 net tariff impact for each category after planned mitigation measures are considered.

The largest tariff impact remains China, and while less than 5% of our COGS could represent $20 to $30 million of tariff expense at current rate for product and component importation into the U.S., these incremental tariffs are in addition to the approximately $30 million of Section 301 tariffs that were included in our initial guidance for the year. Mexico and Canada supply account for approximately 15% of U.S. COGS, but most of the supply from these two countries are imported under the USMCA, meaning that our tariff exposure here remains small assuming the continued USMCA exemption. Finally, there are other smaller tariffs on rest of world imports. Not included in this analysis are other impacts or potential impacts, both positive and negative, to the enterprise, including potential retaliatory tariffs from the EU and Canada on U.S. manufactured boats and possibly engines and parts.

Tariffs are both imported into the United States by our European OEM partners that use Mercury engines and parts, Mercury engine competitors which are paying tariffs on the importation of engines from Japan or other non-U.S. manufacturing locations, and maybe most importantly, the continued disruption of the capital markets and the corresponding impact on our consumer. As everyone is aware, this is an extremely dynamic situation, and the entire Brunswick team is committed to minimizing the overall impact that tariffs ultimately have on our enterprise. My last slide shows our updated full year guidance, taking into account the anticipated net tariff impact and continued market and consumer uncertainties, but also our strong operational performance and the recent market momentum.

Despite a slightly softer marine market than initially anticipated to start the year, we remain confident in our ability to deliver our full year plan, with the result being us holding the midpoint of our guidance with anticipated sales of approximately $5.2 billion and adjusted EPS of approximately $3.25. However, given our exceptional first half cash generation, we are raising our free cash flow guidance by $50 million to greater than $400 million for the full year. This will allow for increased debt reduction efforts, which we discussed earlier, and should enable us to repurchase no less than $80 million of shares at a time when we believe that our share price remains severely dislocated from our performance in a challenge.

As Dave mentioned earlier, retail conditions in July have improved from the early part of the season, giving us more confidence in steady wholesale for the remainder of the year, with Q3 expected to deliver sequentially slightly lower revenue and earnings driven by the annual seasonality of our businesses. I will now pass the call back over to Dave for concluding remarks.

Speaker 5

Thanks, Ryan. As we wrap up, I want to highlight some of our recent exciting new product launches, announcements, and awards. Navico Group Simrad brand recently launched AutoTrack technology for its Halo Radar portfolio that enables automated tracking, multiple targets, and provides unrivaled situational awareness to boaters. Our boat brands across the globe have been busy launching many new products, all featuring Mercury power and Navico Group technology. Our Harris Pontoon brand launched the 2026 Sunliner series with a very stylish and contemporary new exterior and interior. The Sunliner is affordable but also aspirational with many thoughtful features, premium finishes, and uncompromised quality. Our Rayglass brand in New Zealand unveiled the all-new Protector R Edition range, a bold evolution of its iconic high-performance RIBs, leading with the 330 Targa R Edition, the first vessel in New Zealand powered by Mercury Racing's 400R V10 outboard engines.

Sea Ray launched its all-new SDX230 lineup available in sterndrive, outboard, and surf configurations, with a surf version featuring the innovative Next Wave surf system designed to create consistent rideable wakes for every skill level. The system integrates an exclusive Sea Ray interface with Mercury's Smart Tow system, Bravo Four S drive, and dual Simrad touchscreen displays, offering easy control and visualization. Freedom Boat Club recently announced an exciting new franchise in Dubai, our first location in the attractive Middle East boating market. The flagship location will open this fall and feature many Brunswick boats, with additional locations to follow in 2026.

At a time when several other smaller boat clubs are experiencing difficulties, Freedom continues to grow and thrive globally, supported by the ready availability of Brunswick's broad portfolio of boats and Mercury engines, rapid availability of P&A and accessories from our global P&A and distribution businesses, and a variety of financing, insurance, marketing, and IT services also provided by Brunswick. In return, Freedom generates substantial synergy sales while showcasing our exceptional products. Finally, Mercury reinforces its position as the industry leader in the high-horsepower outboard market this week with the introduction of the new 425-horsepower and refreshed 350-horsepower outboard engines, delivering performance, smoothness, quietness, and lightweight far ahead of the competition. During the quarter, we received significant recognition for our people, products, and commitment to innovation, putting us well on track to surpass 100 awards again in 2025.

Among the highlights, Brunswick Corporation was named by Time Magazine one of America's best mid-sized companies for the second year in a row. We also earned six Boating Industry Magazine Top Product Awards. These awards highlight the marine industry's best new and innovative products, and our awards underscore the breadth and depth of our innovation. On the topic of innovation, the Experiential Design Authority also honored us with an award for our impressive and engaging exhibit at CES 2025. For the third consecutive year, Newsweek named Brunswick one of America's most trustworthy companies, placing us in the top 10 within the manufacturing and industrial equipment category, and we were recognized for the first time on Newsweek's list of America's Greatest Workplaces for Parents and Greatest Workplaces for Women, reflecting our commitment to being an employer of choice. Congratulations to all those who contributed to these awards.

Finally, this quarter we released our 2024 sustainability report, which describes our work to reduce our environmental impact while making our businesses more efficient and supporting the communities in which we live and work. That's the end of our prepared remarks. We'll now turn it back over to the operator for questions.

Speaker 3

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two to remove yourself from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. We ask that you please limit to one question and one follow up question. One moment while we poll for questions. Our first question is from James Hardiman with Citigroup Inc. Please proceed. James, your line is live. Please check if you're on mute. We will move on to the next question.

Speaker 5

Can you hear me?

Speaker 3

There you go. Go ahead, James.

Speaker 7

Sorry, AirPod fail. I apologize.

Speaker 2

Thanks for taking.

Speaker 5

James, morning.

Speaker 7

Thanks for taking my question. Obviously the tariff impact came down. I get to about a $0.60 benefit versus last time. Guidance is unchanged. Is the right way to think about this that the ex-tariff guidance came down by about that amount? Ultimately from here, how should we think about is there more risk of upside versus downside just based on the changes you've made there?

Speaker 2

Hey James, it's Ryan. Good morning. If you remember back to April, we gave a tariff net impact potential of $100 million, $125 million. When we translated that to the EPS bridge, we only put a dollar on the bridge. It was for really two reasons. One, we anticipated we'd probably mitigate better than anticipated and indeed we have. Second, if you remember when we reported earnings back in April, it was literally the height of all tariff rates. China was at 145%. Others were at extreme high levels. We didn't know if Canada and Mexico would be receiving USMCA exemptions. The dollar of tariff impact that we put on the bridge was really for those reasons.

Bridge hasn't really changed that much.

I think maybe it's lower on the margins a little bit. On balance, I think what we saw in April has kind of come through that the tariff impact, we think it's going to be certainly lower than we thought. That dollar is still relevant, is still pretty reasonable. The markets unfolded a little bit softer than we thought, although premium core is holding up. No, I wouldn't think that the rest of the business, quote unquote, was down $0.50, and that's what we're guiding. It's just really the year's coming in relatively similar to what we thought in April with $3.25 still being the midpoint of balancing the risks and opportunities.

Yeah, James, I would add that given the dynamics are all around us, it is very difficult at the moment to take things to the bank. Really nice to see the trajectory in July, and we're very hopeful, but that's a four or five week trend. We just need to see a little bit more of that before I think we can flow it through.

Speaker 5

Got it.

Speaker 2

Makes sense.

Speaker 7

As I think about sort of the phasing that you've laid out here, it looks like we should be expecting a significant decrease in Q3 earnings and then a significant increase in Q4. Remind us, if memory serves, I thought that Q3 was the big inventory reduction quarter a year ago, which would have created a really easy comp this year assuming we weren't again under shipping Q3. Is it safe to say that we're now going to be again under shipping in Q3? Maybe there was a shift between shipments between Q2 and Q3 because obviously Q2 was an outperformance quarter. How do we think about all that?

Speaker 2

Yeah, it's pretty hard, James, to delineate between Q3 and Q4. I certainly wouldn't read much into it. Again, as Dave said, giving guidance in a dynamic environment like this is pretty challenging. I would say as a reminder, production was down in the third quarter last year and then even more so in the fourth, both at propulsion and in our boat businesses. There will be pickup there. If you wanted both wholesale shipments in both of those businesses together with a very consistent P&A business, which obviously continues to perform extremely well in this environment. No, I think we're looking at Q3 and I think we're off to a good start with July certainly. I wouldn't read much into the difference between Q3 and Q4. Although the production increase in Q4 versus Q4 of last year will be greater than the production increase in Q3.

There are a lot of timing impacts that go in there and we're still thinking about a pretty strong second half of the year. Makes sense. Makes sense.

Speaker 3

Our next question is from Xian Siew Hew Sam with BNP Paribas Exane. Please proceed. Your line is live. Please check if you have yourself muted. Okay, we will move on to the next question which is Craig Kennison with Robert W. Baird & Co. Incorporated. Please proceed.

Speaker 4

Hey, can you hear me?

Speaker 3

Yes.

Speaker 2

Good morning.

Speaker 4

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

Speaker 2

Yeah, Craig, thank you for the question. I think our expectations in long term for Navico Group are still in kind of low to mid teens operating margin range. We've got quite a bit to go and we should, with a little bit of tailwind, have top line CAGRs in the mid to high singles. There's a lot of potential in that business. I think we're doing a lot of great work both in refreshing the product lines, which are now regaining share even against the very strong and capable competition. We're very excited about that, but also just getting the structure of the business reset, or right size if you like, and optimized for a market that is certainly smaller than we originally anticipated. As you can see, and as we gave some examples in the release in the slides, we are continuing to work our way through that.

All of our businesses had some headwinds this year, as you know, from the.

Speaker 5

Reset of variable comp.

Speaker 2

We didn't really pay any meaningful variable comp last year. Tariffs, a bit of absorption in the first half, but if you net those out, I think we're in a really, you know, getting ourselves in really good shape in Navico Group. I'm very excited about the trajectory of the business and the reception of the new products. Pretty much everything that we have brought out has been a hit in the marketplace. I am very excited for that business and it will be an engine of growth for us in the medium term.

Speaker 4

Great, thanks, Dave and Ryan. If I could ask you just on the tariff question, slide 17 is super helpful as it relates to 2025, but it's been such a noisy environment that it's hard to get a feel for the true run rate. Have you done any work to look at 2026? If, like, current policy persists, how we should think about the full year kind of run rate for tariff policy as it stands today.

Speaker 2

Yeah, Craig, obviously we anticipated getting the question this morning. We have played around with what 2026 would look like. The answer is still pretty uncertain given all the variables. Not only are we paying the tariffs, right, you pay the cash tariffs, but it flows through the various financials in a different way. It goes on the balance sheet as an inventory cost and it flows out through the P&L over time. There are counteractions on duty drawback and substitution and benefit that we get to counteract those tariffs. It is a big basket of things that we think about. Our supply chain team, trade compliance, finance, everyone's kind of figuring out what the best course of action is. It changes because the tariffs change every couple of weeks and our response needs to change.

I would say as we sit here today, I don't see a huge change over next year. It's probably somewhere in the same magnitude. This year we had a 10-month impact, but some of that was at higher rates. We also had some of the costs being hung up on the balance sheet by the end of the year. Next year we'll have a little bit more duty drawback and some of the other financial benefits. Tough to tell. I don't think it'll be greatly different from the 2026 impact. I definitely need to get closer to the end of the year to really see what a run rate looks like. Certainly we'll provide that guidance once we get to the January call. I don't see a huge step change at this date.

Speaker 4

Thanks, Ryan.

Speaker 2

Yeah, maybe just add, Craig. I think clearly we are working to onshore as much as we can at the moment. The rates are one component of what the tariffs will be, and certainly there are balance sheet and other implications here. Broadly, our basis should be going down significantly as we move supply onshore into the U.S., and we're doing that at a pretty rapid clip as you can tell from the way that our exposure even this year is reducing. I would say though, and it was a little bit difficult to say this earlier, that, and we did state it, we are in competitively a pretty advantaged position. The U.S. market is by far the biggest marine market. We are very largely a domestic company here with a very large manufacturing company footprint with a lot of vertical integration.

We believe that even though we'll be impacted by tariffs directly, our competitive position is strengthening.

Speaker 4

Thank you, Dave.

Speaker 3

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

Speaker 5

Thanks for taking my questions.

Speaker 6

I guess first, just on the decision.

Speaker 2

To rationalize the value fiberglass model lineup for 2026 by 25%, how.

Speaker 5

Should we think about maybe structurally?

Speaker 2

The.

Speaker 5

Boat group, whether from a margin perspective.

Speaker 2

a volume potential perspective, given that rationalization?

Speaker 5

Thanks.

Speaker 2

Thank you. Good question.

Speaker 5

So.

Speaker 2

The amount of complexity that you can tolerate in a product line depends on the volume. With volumes reducing, we can tolerate less complexity. We take out those models that are obviously selling less. That's the kind of rationalization process we want to leave ourselves with: a good progression in the product portfolio, but not excess complexity. That's really what we've been doing. There are other actions that we are taking that we'll be able to talk about a bit later in the year to further ensure that we have stronger profitability in that part of the market. That's really the way to think about it, reducing complexity in a market that is smaller. I would say, though, I think everybody understands this, that the profit contribution of all of our Brunswick boats.

Speaker 5

The boat.

Speaker 2

Group margin is only one component of it. All of those value boats have Mercury engines on them. A lot of them contain Navico Group technology, and the margin stack, even in our value product lines, remains pretty good. We want to make sure that we are thoughtful as we approach this and that we consider the entire Brunswick margin impact. Really helpful.

Speaker 5

Maybe just one more quick one.

Speaker 6

Any color on the tariff impact?

Speaker 2

The quarter, and then apologies if you.

How should we think about maybe the distribution of that impact across segments at a high level?

Speaker 4

Thanks.

Speaker 2

Yeah, I could take that, Noah. I mean, again, it's a bit different because the cash tariffs paid are obviously much greater than what's on what's flown through the P&L. Through the P&L, it's somewhere in the mid-teens for the quarter millions. There are all kinds of offsets and duty drawbacks that kind of net against that number. About 75% to 80% of the tariff impact is on Mercury, is on the Mercury segment, I'm sorry, on propulsion mostly, a little bit on engine P&A, with Navico having kind of the rest of it and boats having a very small amount. One other item, this is late breaking from earlier this week or late last week. We're obviously monitoring the 15% tariffs coming from Japanese imports. As Dave mentioned, we are the only U.S. engine manufacturer, with our main competitors primarily manufacturing in Japan and almost none in the U.S.

One thing we'll be monitoring, and this is not in the tariff number and obviously a benefit, is the impact of that on Mercury sales and our ability to continue to take market share, as we believe our products are already market leading. This is just another input for the costing profile.

Speaker 5

Thank you.

Speaker 3

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

Speaker 4

Hey, good morning. Did you update your full year industry?

Speaker 5

Retail assumption for boats?

Speaker 2

No, I don't think we specifically did that. I think that the trend that we are seeing is really what we called out.

Speaker 5

Is.

Speaker 2

Solid performance in premium and core, which is 75% or more of what we make, and weaker performance in the value part of the segment, which is the value part of the market, which is down about 20%. I don't see a really strong reason to deviate from that kind of profile. I don't think we specifically updated any numbers yet.

Okay, what are your channel.

Inventory weeks on hand, and how are.

Speaker 5

You expecting to manage that?

Speaker 2

What's your target by year end?

Speaker 5

Thanks.

Speaker 2

Channel inventory?

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

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

Speaker 4

Okay, and the thousand, was that?

Speaker 2

A full year target, or is that.

Speaker 5

A second half target?

Speaker 2

That'd be a full year target.

Speaker 3

Great.

Speaker 2

I just.

Speaker 3

Our next question is from Xian Siew Hew Sam with BNP Paribas Exane. Please proceed.

Speaker 1

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

Speaker 2

It's actually a little bit of pipeline.

It's something we haven't really talked too much about. We have a little bit on the engine side, but over the last, call it, six quarters or so, we have taken out substantial pipeline inventory on the engine side. Call it 25% or so, maybe plus or minus even more on high-horsepower. That's at a time when, like you said, some of our competitors were pushing engines into the U.S., whether it's in advance of tariffs or other. That's certainly the wholesale trend. What you're seeing is now kind of a matching of our continued retail share gains with our OEM customers that are actually producing a little bit more this time of year than they were last year.

At this point, even in June of last year, May and June, a lot of our OEM partners were taking fewer engines because they had them in stock and they were going to produce fewer boats in the outlook months. That ended up happening. Today, at a time where production is pretty stable and pipeline's lower, they're needing engines and we're fulfilling them. We've done an entire review of all of our OEM customers. We are not losing share in any of them, any of them that are kind of dual sourced, if you would. We plan to continue to gain retail share for the full year, just as we've done the past several years. It is really a pipeline game. That's right now at a really healthy point where we'll probably be able to add engines here to make sure that wholesale exceeds retail over the coming quarters.

Speaker 1

Okay, got it. That's super helpful. On that point, where does the pipeline kind of end for engines or end by the end of the year? How do you think about kind of the margin progression from here in propulsion?

Speaker 2

Yeah, as we currently sit, by the end of the year, pipeline will be down about 25% from the beginning of 2024. It's kind of in the mid-30s, down % wise on engines greater than 175. You know, a lot of what it does from there is dependent on kind of the OEM patterns as we start all the way into 2026 and the next retail cycle. As we sit now, I don't think we're going to take much more out. I would say the second half this year, second half is not anticipating a whole lot of takeout. What we've taken out is kind of is where we'd sit, but a little of that depends on where retail lands.

Speaker 5

Got it.

Speaker 2

Super helpful.

Speaker 1

Thank you, guys, and good luck.

Speaker 3

Our next question is from Stephen Grambling with Morgan Stanley. Please proceed.

Speaker 5

Hi.

Speaker 4

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

Speaker 2

Yeah, maybe we can. A lot of work going on, particularly with our supply chain, and it's been a very dynamic time. Obviously, we've been a time when we have done some banking of inventory, but essentially it has been very diligent management of incoming supply chain to make sure that we aligned the whip and overall inventory levels with the production requirements. That is not an easy process. It does require us to work very closely with the supply base, and our team has done a wonderful job of doing that and managing to make sure that we keep a very healthy supply base, but that we don't oversupply ourselves. I think there's more room to run there, and we continue to see benefits from that. We have very clear targets both in the short term and long term for our inventory levels.

Those inventory levels have come down, I think, a couple of hundred million in the last, in over the first half of the year. Ryan, anything you want to.

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

Got it.

Speaker 5

Thank you.

Speaker 3

Our next question is from Joseph Altobello with Raymond James & Associates Inc. Please proceed.

Speaker 2

Thanks.

Speaker 1

Hey guys.

Speaker 5

Good morning.

Speaker 6

Go back to the engine commentary for a second.

Speaker 5

If we assume a 15% tariff on.

Speaker 6

Japan, I would think the impact here is pretty straightforward.

Speaker 2

Right.

That would obviously significantly improve your competitive positioning. I guess first, is that showing?

Speaker 6

Up yet in OEM orders, and second, is that baked into your outlook at all?

Speaker 2

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

Speaker 6

Okay, very helpful.

Speaker 4

Maybe secondly, you referred to a certain.

Speaker 6

Rationalization and manufacturing capacity optimization efforts.

Speaker 5

Maybe.

Speaker 4

Could you elaborate on that?

Speaker 6

What businesses sounds like Navico and Boats.

Speaker 2

Is part of that, maybe.

Speaker 5

Are there others as well?

Speaker 2

Yeah, I think it's certainly we need to continue the process of ensuring that we have good productivity and efficiency, and that our overall capacity is aligned with our expectations for the market. We've been continuing to work on that, and I gave a few examples.

Speaker 4

In.

Speaker 2

The commentary that we previously provided. There is more work to do and honestly, Joe, we'll be able to share a bit more explicitly probably in the third quarter call on that or maybe some kind of intermediate basis. There are various things that we're continuing to progress that will, I think, materially address fixed costs in those businesses.

Speaker 5

Okay, understood. Thank you.

Speaker 3

Our final question is from Jaime Katz with Morningstar. Please proceed.

Speaker 0

Hey, good morning. Thanks for squeezing me in. I'm curious about the second half projection for boat sales. It implies basically that we're returning to growth. I'm wondering if part of that is just mix from higher price boats or if you guys have seen interest or rising commitments from dealers that may help us see if we are at the trough.

Speaker 2

Yeah. Good morning, Jaime. I think it's kind of two things. One, goodness in July has given us some momentum here as we get into the back half of the year, and we believe will continue to spur dealer orders. Certainly, the year-over-year comps versus the second half of last year really are a bit of a driving factor. We took substantial production out in 2H 2024 in order to keep inventory fresh and at the right levels this year just to match retail and wholesale. The wholesale will be stronger right in the second half. Yes, premium and core. We plan on being up more than value, as Dave and I have said on the call. If you go back and look at production rates, it's just matching wholesale and retail and the comparison versus an extremely light back half of 2024.

Speaker 0

Can we just focus on value? Obviously, there are some value products that are moving. Do you guys have any insight into what consumers, what is facilitating conversion of those sales, and then maybe what we should be looking for to determine when those sales may return outside of interest rates perhaps?

Speaker 2

Yeah, a couple of things. Obviously, you know, just broader economic sensitivity in that via population, if you like. Any uncertainties about, you know, inflation, employment, other things tend to be more acute in that population.

Speaker 5

It is.

Speaker 2

An area where we see more financing at the point of sale, so more sensitivity to interest rates. Certainly, I think we're doing a pretty good job in that segment, but it does require more promotions. You need to provide a reason for somebody to make that purchase. We try and do that by having the freshest inventory, the newest products, and other things in the marketplace. In the current environment, it also takes a bit of an economic push as well. I think hopefully we'll begin to see some interest rate reductions in the back half of this year that will provide a bit more momentum. We'd hoped to see something earlier in the year, but those didn't materialize. I would say that those interest rate reductions are probably going to disproportionately benefit the buyers of value or entry-level product.

Speaker 0

Thanks.

Speaker 3

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

Speaker 2

Thank you for your questions, everyone.

Speaker 5

Much appreciated. It was another solid quarter for Brunswick.

Speaker 2

Lots of new products, very diligent operational work leading to our performance really across all of our businesses and segments.

Speaker 5

A couple of things probably stand out: our cash performance and also the fact.

Speaker 2

Our revenue was slightly up over.

Speaker 5

The second quarter of 2024.

Speaker 2

It was nice to see that inflection. Great to see. As we noted, we're continuing to work hard and in a smart way to.

Speaker 5

Mitigate the direct impact of tariffs, as we discussed in some of.

Speaker 2

The questions here, our footprint and vertical integration do provide us with a fundamental competitive advantage in the presence of persistent tariffs. We are working really tirelessly on further.

Speaker 5

Actions to re-expand margins in the.

Speaker 2

Business and we really have very tangible actions lined up to achieve that. Finally, although we are beyond the midpoint of the selling season, we.

Speaker 5

Do get a real sense that the.

Speaker 2

Market wants to rebound with just a little more kind of normalization of the macro backdrop, maybe later in the season, some tailwind from interest rates.

Speaker 5

As we enter the second half.

Speaker 2

We do enter it with some cautious optimism. Thank you very much.

Speaker 3

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