Good morning, and welcome to Brunswick Corporation’s Second Quarter 2024 Earnings Conference Call. All participants will be in a listen-only mode until the question-and-answer period. Today’s meeting will be recorded. If you have any objections, you may disconnect at this time. I would now like to introduce Neha Clark, Senior Vice President, Enterprise Finance Brunswick Corporation. Please go ahead.

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

Thanks, Neha, and good morning, everyone. With high interest rates continuing to pressure consumer budgets and suppressed discretionary spending, the introduction of new model year products at the beginning of the important month of June did not catalyze bulk purchases as we had anticipated and our second quarter results were slightly below expectations. Without strong peak season momentum, the continued slower retail sales combined with higher levels of discounting and carrying costs have increased pressure on dealer and channel partner profit margins, resulting in ongoing conservative wholesale ordering patterns even for new model year products. In turn, this is causing OEMs to maintain lower bulk production rates through the main selling season, with impacts to propulsion and Navico Group OEM orders. With slower new boat retail sales in the peak sales months, we now expect full year unit retail sales to be down approximately 10% versus our original forecast of flat. As a result of heightened demand stimulation efforts focused on clearing more aged field inventory, our remaining field inventory is very fresh, with approximately 85% of units being current. And our focus continues on leveraging our new products and adjusting production levels to maintain or gain share in key categories, while diligently managing field inventory levels to end the year with weeks on hand at appropriate levels and units below prior year. Despite sales and earnings below guidance, the resiliency of our portfolio is being demonstrated, with our recurring revenue businesses and channels including our Engine P&A business, Propulsions and Repower business, Freedom Boat Club and Navico Group's aftermarket sales, contributing more than 50% of our Q2 adjusted operating earnings. In addition, our businesses delivered strong cash flow, enabling $170 million to be deployed for share repurchases year-to-date and further solidifying our focus on returning value to shareholders. Turning…

Thanks, Dave, and good morning, everyone. Brunswick's second quarter results were slightly below expectations, but remained resilient despite a challenging macroeconomic environment and much softer US retail marine market than anticipated. Versus the second quarter of 2023, net sales in the quarter were down 15% with adjusted operating margins of 12.5% resulting in an adjusted EPS of $1.80. Gross margins continue to remain resilient. Adjusted operating expenses were down $32 million versus Q2 of 2023 and free cash flow performed better than anticipated with free cash flow conversion of approximately 140%. Second quarter sales were below prior year as the impact of continued lower wholesale ordering by dealers and OEMs coupled with higher discounts in certain business segments was only partially offset by annual price increases and benefits from well-received new products. Adjusted operating earnings were down versus prior year as a result of the impact of lower net sales and higher manufacturing costs primarily related to absorption from lower production partially offset by significant cost control measures throughout the enterprise. On a year-to-date basis, sales are down 19% resulting in an adjusted diluted EPS of $3.14, down 36%. The entire enterprise remains focused on reducing operating expenses, which are down $43 million versus first half of 2023 levels. Finally, year-to-date operating deleverage of 27% remains slightly higher than the midpoint of our assumptions in our downside scenarios, but has been negatively impacted by unique factors including increased discounting, elevated depreciation expense primarily related to recent capacity projects in propulsion, and lower absorption across the enterprise due to lower production volumes. Now, we'll look at each reporting segment starting with our propulsion business. Sales in our propulsion segment were down 21% with lower production rates at OEM boat manufacturers resulting in fewer engine orders in the quarter, while repower shipments…

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

Thank you. [Operator Instructions] Our first question comes from the line of Fred Wightman with Wolfe Research. Please go ahead.

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

Yes. Fred, it's Dave here. Yeah. So yeah, as normal over time, I think our internal retail projections and SSI will align. But as you know, it normally takes a few months to do that. Through Q1, we were kind of our internal retail was about flat, slightly ahead of the market. And then through Q2, we saw a weaker May. It was down about something, maybe 8% to 10%, which we expected because of the multiyear changeover that was happening in June. What we hoped and anticipated was that the new models in June would catalyze some increase in retail, but that didn't happen. And our June is down about 20%, essentially in line with SSI. The difference with SSI is -- some of the states that report late or some of the states that we have the highest market share in, particularly in the Midwest for our freshwater products. So we're pretty aligned with what's going on with SSI at the moment with those caveats. So, could the market really be down high singles yes, it could be. But given our uncertainty level at the moment, I think 10% is high singles to 10% is probably reasonable. But July is better than June. Still down maybe kind of mid- to high singles at the moment, but that would still give us something in high singles to 10% at the end of the year. By the time we get through July, we're through 75% of retail. So the ability to shift that endpoint much is diminished after the end of July.

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

Well, I think we're approaching the year-end, with a conservative view on inventory. And when I say conservative, I mean we're at the low end of what we think is going to be necessary for 2025. And we could talk about 2025, at some point maybe during the call. But I feel as though on a -- across our various segments, with that level of inventory, we will have derisked any reasonable scenario for 2025. If you look across -- inventory levels across the various segments they're very balanced everywhere. So by the end of the year, a lot of our value products in aluminum will be kind of relatively down. Premium fiberglass will be up a bit versus the end of last year, but really that's necessary because we were under inventory and those segments are performing relatively better. So, I think that's better to be a bit conservative at this point in time, I think.

Fair enough. Thank you.

Thank you. Our next question comes from the line of Michael Swartz with Truist Securities. Please go ahead. Q – Michael Swartz: Hey, guys. Good morning. Maybe just to start at high level broad brush strokes, is there any way to think about what may be the initial dealer volume commitments for your model your 2025 product looks like, at this time, this year versus last year? I know there's some differences in the timing of the model year changeover and probably when dealers are thinking about accepting more inventory. But just very high level, is there any way to think about what that looks like?

Yes. Hi. Mike, yes, at the moment more than 70% of our planned production for Q3 is accounted for with orders, which is relatively normal for us. So with brands like Boston Whaler its 100% accounted for. With some of the aluminum brands where we have smaller boats, all the way down to a few thousand dollar boats, that's pretty normal as well. So I think we're pretty comfortable with the position we're in for orders for the third quarter. We know less about Q4, at the moment. Q – Michael Swartz: Okay. And then just on the cost reduction program, I guess I'm trying to understand it seems like it equates to something in the $70 million to $80 million range. Just trying to understand, is that an annualized number? It sounds like that's just for 2024. And then, how much of that is actually variable, meaning how much of that would come back if and when production comes back?

Yes, Mike, I'll take this. Good morning. By the end of the year, OpEx is going to be down pretty close to $100 million right or somewhere $90 million to $100 million, which is about 10%. Of that, a chunk of that is compensation expense, which will obviously be pretty low this year given where we are versus our targets. That portion would expect to come back obviously and we reset that at 100% to start 2025. And then there's pieces that obviously are being delayed spending in 2024 that we would also want to come back to 2025, given a better market environment. But it's fair to say that, about one-third of that we would say is a complete takeout that we would keep out for the very certainly, near term and would not be added back until -- or if at all when market conditions improved and we were able to spend a little bit more for growth.

I think the third is really for 2024 as well. So, the impact of that third on 2025 on a run rate basis would be higher. Q – Michael Swartz: Okay, great. Thanks a lot.

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

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

Yes, certainly. So, I guess, what we're seeing premium is still somewhat stronger than value. But I would say the other thing that we're seeing is that generally fishing-related products all the way from Boston Whaler saltwater fishing at the high end through to some of our aluminum fishing at the more value and kind of core part of our market are all relatively strong. And the more general purpose kind of general recreational products seem to be performing somewhat weaker. So, that would be things like value fiberglass runabouts pontoons are definitely down more than the market at the moment. So, those are a couple of ways to kind of break it down at the moment. I think we're fortunate in being strongly indexed to fishing probably about two-thirds of our products are fishing-related products. So, I think the strength of that part of the market continues to favor us going forward. So, yes, it's -- those people who are committed to boating, not just for boating, but for other activities like fishing, seem to be prioritizing their spending this year versus others who may be are more inclined to trade off one activity a bit more versus another.

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

Yes it's a good question. And maybe I'm going to -- I'll go ahead and just tackle 2025 our views on 2025 given your question. But the short answer there is we always believe that we can lever up incrementals at 20% or more. And frankly, we've delevered this year at about that same pace if you normalize for absorption and discounting that 27% year-to-date number would look just about right at 20% maybe even a little bit below. But the way to think about 2025 for us first, it starts the consumer we're obviously assuming slightly hopefully healthier economic conditions a rate environment that has begun to come down, but still employment being low GDP still being relatively resolute. Obviously, November is going to throw some uncertainty into the ring, but we'll get through that as we always do. The result there would probably be some stability in the marine market. Just as a sign we're likely to finish the year main powerboat segment is about 140,000 units, that is 5% above where we were coming out of the GFC, which was a much tougher macroeconomic environment. I think it's reasonable to assume a market -- and obviously not making a call for the 2025 market yet, but I think it's reasonable to assume that a flat market to this year is kind of a floor with some upside into low or even mid-single-digits, which would get back half of the market loss this year and would also represent a retail level that is approximately 50% of what we would consider a replacement level for the U.S. market. So, from then you go to the wholesale retail dynamics, which Dave touched on earlier. But in a flat market and wholesale matching retail, you get about 1,500 boat units back…

Great color. Best of luck.

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

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

We do. We do James. And in a flat market you could assume we get 1500-plus back and then the associated engine benefit to. And again, if wholesale matches retail to get the benefit with our boats but also putting our engines on 48-plus percent of the boats in the US even more with multiple engines. And then if you can assume retail slightly up then yes you're in a world where wholesale could exceed wholesale this year by 10% plus. So yes you're getting -- you can definitely get a big a chunk of that back.

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

Yes, James. So a good question I think. I think the -- broadly any studies you look at on demographics through to 2030 and we've mentioned this before suggests that the wealthy are going to get wealthier. And generally that's supportive of us just like it is for a range of other discretionary items. I do think what we're seeing is a couple of things here. One is of course as you mentioned the interest rate environment. And you mentioned that these purchases are interest rate sensitive and of course they are. But I do think that there are a couple of other kind of layers of impact of interest rates particularly for some of our core consumers. It's not just about the fact that financing the purchase is more expensive. It's overall that budgets are pressured more by cumulative inflation and interest rates on other finance purchases. Not to mention the fact that there's a confidence issue there. So I think there are various dimensions that are influencing discretionary purchases at the moment beyond simply the increased financing costs. I think over time what we've seen with the cumulative impact of inflation is going to kind of kind of average out over time. The last couple of years we've had relatively small increases. And certainly, we would anticipate that next year. So I think there are a number of factors that are in play here. Cumulative inflation the secondary and tertiary impacts of interest rates that are larger barriers or inhibitors than we had anticipated. But I do think that there's no reason to believe that there's a secular negative trend here. We always also plan to outperform the market. And generally, we've continued to do that particularly obviously on the engine side, but with some of our bulk brands, which have gained share year-to-date like Boston Whaler and Sea Ray that support that kind of wealth accumulation trend.

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

Got it. Thanks guys.

Thanks, James.

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

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

Yes. So I think the impacts that you're seeing on propulsion are a couple of things at the moment. In terms of how much down is Mercury versus others? Well our share is up year-to-date. So, we're obviously less down than the market. And we would anticipate that through this year, we will continue to gain share in Mercury, no reason to believe that we won't. I think the good news in propulsion at the moment is that obviously, we've had to adjust production down to support market conditions, which are lower than we anticipated but we've taken a pretty prompt action on that. The other thing that you're seeing though is that a significant destocking trend at OEM customers. And now we look at retail and wholesale across every segment of outboard production and they are back in balance. So I think that's -- it's a good trend for us. It means that any increase or growth in retail is going to flow pretty directly back to Mercury. But we are in a situation in which OEMs are just not wanting to take any product that they don't think is going to go on the back of a boat in 2024. They know we have production available which was not always the case in the past. So as in many other areas they are ordering kind of smaller quantities more frequently and making sure that they match what their use patterns are going to be. Did you want to follow up?

Yeah. I'll just -- wholesale units for engines is going to be down about 20% this year, which is roughly close to what boats would be which is down kind of 24%. But you're going to see a lot more of that in the back half just because of production schedules. We're still pretty good in the first half. We have enough inventory. As Dave said, OEM orders did slow quicker than we thought. And again, not because of their choosing other engine providers, but just because production at our OEM partners slowed quickly through the first couple of quarters. So the back half all you're seeing is the same dynamic that you're seeing in boats just a little bit later in the year. Both started taking wholesale out really in the middle of last year. And you're just seeing it happen quicker in propulsion. But I would say engine pipeline which again, we can't track -- we don't track as closely, but we do know that engine pipeline will be down from the start of the year because we will be under-shipping retail, again to start us off in a really nice position in 2025.

Okay. Got it. That's super helpful. Thank you. And then just a follow-up on the margin line. What you're guiding for from a propulsion perspective I think it's decently or solidly below 2019 levels, yet sales are still well ahead. And understand the impact that production has on that. But can you just maybe provide some more color around the margin guidance, I think it does imply some pretty steep decrementals in the back half just relative to what you've talked about? And then just tie it with -- I know a lot has changed in the year, but last -- nine months ago you talked about kind of a 20% margin for this segment. So is that still realistic to think about in a more normal environment? Or have things kind of changed too much?

Yeah. And it's a fair question a good one. I would tell you -- let me answer in reverse, yes. There's no reason that at normal production volume and normal market conditions that the propulsion business can't be back at or above 20% operating margins. It is simply a volume game for the full year that's driving that margin down. The absorption impact on the lower production is pretty significant, call it north of $30 million. Currency is a little bit of a bad guy that most of it is in the first half, but that's really hurting. And just overall, there's not the optics you can take out quick enough to overcome the absorption and hit there. And then also remember the depreciation is larger there this year because of all the capacity projects and capital we've put in there. So they're getting that impact of a head without companying sales which we will get eventually. So you're kind of getting a mismatch there. So we agree. It's certainly worse than we anticipated, but if you normalize take out absorption and kind of the one-timers, you're still in the mid- to upper teens at a normalized volume. You get a little bit more volume back to a retail market that looks just a little bit better and you're getting back close to that 20%.

Awesome. That’s super helpful. Thank you.

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

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

Yes, Xian. Thanks for the question. I think -- I mean obviously, we have a number of considerations when we're trying to kind of target retail. We think about weeks on hand. We also think about units in the field. When we think about units per dealer, which we've talked about a lot there is an issue that if we go down too low, we just can't carry a representative segment of our product line across the bulk of our dealers. So we're trying to balance a number of factors here. I think if we consider one factor, you might get one slightly different answer to another factor. But the fact is that we are going to significantly under ship retail this year and I believe still end up with a decent number of units at each dealer. Really the area where we are going to have -- are going to increase inventory slightly versus last year is in the premium end of our product lines particularly Boston, Whaler and Sea Ray. And we were still working our way out of a hole on those products through the last several years because we couldn't catch up after the supply chain crisis. So thinking about it in those different ways I think we feel it is a good balanced position to be in and derisk 2025.

Okay. Got it. Really helpful. And then maybe on propulsion to your point, the wholesale volume declines are down kind of in line with new boat sales. Do you think the segment is becoming more correlated to new boat sales? Or are there are kind of like the structural tailwinds still intact? And then also kind of pricing has been -- or price mix has been a big benefit. Is that under pressure at all? Or are you able to hold that and it's just volume that's coming down?

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

Okay. Thanks.

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

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

Yes. Craig, that's tough. I mean obviously there -- you can track the rate they're paying right? So our -- with our benefit of having BAC, our dealers are paying out of a SOFR plus the bank rate, the SOFR plus a percentage. So obviously that's up several points since 2021 and you can take the average kind of average floor plan there times that rate. But all in all, I think the dealer network remains extremely healthy. We get reports every couple of weeks on -- and amount of boats in the field that are aged and any challenges that our dealers are having paying floor plan or covering their sales. So we're not seeing any concerning trends. In fact, throughout the summer, aged inventory -- now Brunswick has been well across the way, but aged inventory around all of BAC's portfolio has gone down. And we're seeing really good liquidations on anything more than a year old. So you can do the math by just taking the SOFR plus the change in rates, but all in all still a pretty healthy environment.

And then shifting gears, just a lot of this discussion has been the macro which of course you don't control, but it seems like there is a self-help opportunity at Navico. And I'm just wondering, where you think -- what the current expectation is for I guess margin -- the margin profile of that business if we get back to let's say 150,000 boats?

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

Great. Thanks, Dave and Ryan.

Thank you

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

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

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