Brunswick Corporation

Good morning and welcome to Brunswick Corporation 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 Faux, Brunswick CEO, and Ryan Gwillam, 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 suppress 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 boat 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 month, 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 Repower business, Freedom Boat Club, and Navigo 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 to some highlights from our segments in the quarter. Despite our propulsion business delivering lower sales and operating earnings versus the second quarter of 2023, year to date, we continue to gain share in outboard engines, with more than 48% overall share of the U.S. outboard market. In addition, propulsion's controls, rigging, and propeller product categories had a strong quarter, with operating margins ahead of the same period in 2023. Our flight eFoil business also had its strongest ever sales month in June, With boating participation continuing to be very solid in our major global markets, our engine parts and accessories business had a strong quarter, with sales and operating earnings up versus the second quarter of 2023, and we completed the full transition of engine P&A distribution to our new state-of-the-art facility in Brownsburg, Indiana. As anticipated, Navico Group had lower sales and operating earnings versus the second quarter of 2023, due to reduced marine OEM order rates and persistently slow RV orders, but continued to show stability with sequential improvement in aftermarket sales and overall sales and earnings consistent with first quarter results. Finally, our boat business had a solid performance given market conditions, with sales and operating earnings below the prior year quarter, consistent with lower planned production levels. Freedom Boat Club continued to deliver steady membership sales growth while adding two more flagship locations in Denmark and the UK and recording an impressive 200,000 member trips in the quarter. Expanding on the external environments, with the majority of the retail selling season behind us, it is evident that the 2024 U.S. marine retail market is underperforming versus our initial expectations. due to the continuing high interest rate environment. And while there is now a higher probability of interest rate relief beginning in September, this will be after the main selling season and will likely have a minor impact on 2024 and be more of a potential tail end for 2025. Dealer sentiment is sequentially improving. However, the slower pacing of wholesale orders continues as the weaker retail environment drives a desire for more conservative inventory levels. Discounting and promotion levels remain elevated, particularly on prior model year products to stimulate retail movement. Our investments in digital platforms continues to drive benefits across our brands, with close to 40% of Boats and Freedom Boat Club membership sales in Q2 being digitally assisted. OEMs and channel partners continue to moderate production levels to adjust to the environment, and in the absence of external stimulus, we do not now foresee this pattern changing significantly through the remainder of the season. Despite these challenging conditions, we continue to see strong voting participation, supporting our resilient recurring revenue businesses. We continue to invest in and launch many exciting new products and technologies across all our businesses and product lines with the intent to position us for market share gains and to ensure we have the freshest portfolio when the market returns to growth. Finally, the previously proposed North Atlantic right whale vessel speed restriction rule was delayed to November 2024 on the administration's most current regulatory agenda. Moving now to U.S. retail performance, we saw a weaker Q2 U.S. retail market than anticipated with U.S. industry new boat unit sales in the quarter declining significantly versus the second quarter of 2023, driven particularly by a weaker June. U.S. outboard engine industry retail units declined 6% in the second quarter versus prior year. As mentioned, Mercury Marine U.S. overall year-to-date outboard market share is holding at around 48%, up slightly from 2023. and our share of 350 horsepower and above engines exceeds 70%. As customer OEMs modulate production, which in some cases requires extended manufacturing shutdown periods, we expect market share data across engine and boat brands may be more noisy than normal for the remainder of the year, although we anticipate gaining additional share in some areas. During the quarter, we continue to diligently monitor pipeline levels. and we ended the quarter with 33 weeks on hand and 11,500 units in the US pipeline, slightly above prior year. In order to manage year-end pipelines on a four-year basis, we currently plan to wholesale around 1,500 fewer units than internal retail unit sales, which represents approximately a 7% reduction in ending inventory versus prior year. Before I turn it over to Ryan, I wanted to quickly walk through the components of our updated adjusted EPS guidance of between $5 and $5.50 per share. As you can see, just about all of the anticipated decline from our view in April is related to the softer market conditions that have persisted through the main retail selling season and the resulting channel dynamics we believe we will experience for the remainder of 2024. The most significant change since April is the combined impact of the weaker market and resulting lower wholesale sales in an environment where we anticipate pipeline inventories to be flat to down across all our businesses. We plan to wholesale several thousand fewer boats this year than originally planned. And despite continuing to take market share, Mercury will correspondingly ship fewer engines to OEM partners who have also lowered production to be consistent with demand. The next two factors are directly related to the slower market conditions. First, all our businesses are experiencing lower absorption and slightly higher manufacturing costs due to the lower production levels. Second, we continue to use promotions and discounting to drive retail sales and to keep our imagery as fresh as possible. Offsetting these factors is our combined focus on driving down controllable operating expenses. We anticipate ending the year with OPEX down almost 10% from initially planned levels, while still protecting spending on key growth initiatives and projects to advance our strategic objectives. Despite this year not unfolding as we'd hoped and anticipated, we continue to make prudent decisions and expect to finish 2024 in a strong, balanced position, while preparing to fully capture the upside when the market returns to growth. I'll now turn the call over to Ryan to provide additional comments on our financial performance and outlook.