Good morning, and welcome to Brunswick Corporation's Second Quarter 2023 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 proceed.

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 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.

Thanks, Neha, and good morning, everyone. Our businesses executed a strong second quarter, benefiting from market share gains, well received new products, solid operational performance and diligent cost control. We delivered $1.7 billion in net sales and adjusted earnings per share of $2.35, including the financial impact of the IT Security Incident, which I'll discuss more in a moment. Mercury Marine continues to gain market share with the US outboard retail market share up 140 basis points year-to-date versus prior year. While the new boat market continues to face headwinds, there's been relative improvement in recent months, with preliminary June US SSI main Powerboat retail turning positive and Brunswick outperforming the market in June and year-to-date. As we move through the core season, Oakfield inventory remains at an appropriate level in most categories. And we closed the second quarter with around 19,000 units in our global pipeline. We are focused on ensuring the pipelines remain healthy, exiting 2023 and going into 2024, balancing the need for our dealers and other channel partners to carry a good representation of our portfolio at their locations, while ensuring that we maintain inventory freshness. We generated strong free cash flow of $193 million in the second quarter, resulting in 2023 first half free cash flow coming in $144 million higher than prior year. In addition, we continue to be aggressive with share repurchases, executing $132 million of repurchases year-to-date. We are relentlessly executing our strategic priorities, including advancing our Aces initiatives, investing in new products, progressing our operational excellence goals and implementing structural cost reduction actions across the enterprise. On June 13, we announced that we've been impacted by an IT Security Incident, which ultimately resulted in second quarter financial results that were lower than initial expectations. The disruption associated with the IT security…

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from James Hardiman with Citi. Please proceed with your question.

Hi, good morning. Thanks for taking my call. Obviously, what -- it sounds like you're trying to take us down the path of, and I think a lot of people are trying to do the math of how much of the revised guidance is the IT incident and how much is what's going on in the channel, and you've got some good slides in the deck that help us with that. I guess, maybe if we think about the outlook on a segment-by-segment basis, right? You guys have got the slide where we go through what you're assuming for sales and operating margins for each of those segments, each of them looks to be down versus the previous guide. I guess, maybe walk us through what's IT and what's not IT in those segments. I feel like I can comfortably say that the propulsion piece on one end of the spectrum is almost all IT, whereas, the Boat piece on the other end of the spectrum, it seems like it's more demand and market dynamics. But maybe walk us through how to think about those various items.

Thanks, James. Thanks for the question. Yeah, I think the -- as you mentioned, certainly, Mercury was impacted by the IT incident most. And the issue there, as we mentioned, is recovery -- our ability to recover high horsepower. I think you -- I think there was some kind of questions earlier in the year about whether Mercury could continue to gain market share, but you saw even on a rolling three basis, we're above 50% market share now. So demand, particularly for high horsepower remains high. So our ability to recover that may be limited. Obviously, we'll be doing what we can. We're not counting on it. Broadly on P&A, we continue to see, I think, more modest spending. We didn't really talk about this much on a regional basis, but I would say it's probably overall better in the US and slightly weaker in some of the international markets. In Navico in particular, though, although we said that that Navico was not one of the most impacted areas in -- by the security instant, we noted about $15 million of revenue impact on other segments. The majority of that was Navico. So Navico was about 12 million, 13 million of revenue and associated earnings in the quarter. Navico continues also to be impacted by the slow recovery of RV, that's probably about another $15 million of top-line there for Navico. Our Boat Group is really about inventory restocking patterns. As you mentioned earlier, we're going to be extremely disciplined. We have been extremely disciplined. I think the first half of Boat Group has been extraordinarily strong. Margins have held up really well. As we -- if you look at Q3 last year though, for Boat Group, it was pretty strong. Margins held up reasonably well. Q3 is generally…

Yes, it's a good question. I understand how our -- how those are slightly contrarian, kind of, indicators. I think the this is kind of not just about the year 2023 and 2024. It's a bit about the shape of the year, kind of 2023 and 2024. The overall year-to-date retail is trending a bit more towards where we thought it would be earlier in the year and what we indicated it would be. But kind of at the lower end of that, I would say. That said then, I think some other people thought the market might be. But because of high interest rates and because of dealer inventory levels and carrying costs, I think what we're expecting is that there is not a high incentive to carry a lot of inventory through the back half of the year. I think customers probably in towards the end of the season are going to be less willing to buy a boat and pay the interest fees through several months in the northern market, where they might not be using the boat, especially if they believe that availability is going to be better in the early part of 2024. In terms of inventory levels, I think there are quite a number of things for us to think about. One is the unit level on an aggregate basis, another is the unit level by dealer. What we tried to show in that kind of histogram was our dealers are not over-inventoried at all by historical standards. In fact, 75% are below at our 2019 levels. And we do need them to keep a representation of a good representation of our portfolio. But I think they are feeling the higher dollar value of the inventory. That's certainly a consideration for them. And they are cautious on the customer, I think. So I think we're going to hit a reasonable spot where we get good portfolio representation, but don't have dealers carrying what they believe are excess amounts of inventory. In terms of weeks on hand, that's probably going to be in the U.S., 35 to 40, maybe 35 plus, which should be roughly at a historical level on a kind of weeks-on-hand basis but lower on a unit basis than kind of pre-COIVD. So not sure if I exactly answered the question, but those are some of the considerations as we think about the back half of the year. We're very pleased with the performance of the Boat group. I think the benefit of new models, the cost control, expense control restructuring that we've done in the Boat Group is really paying dividends. But we just want to set ourselves up for a successful 2024.

And Dave, the one thing I'd add is we are outperforming the market as a whole and taking share in outboard fiberglass outboard Pontoon and fish. So in terms of James' question on vis-à-vis the other manufacturers, we feel like we're more than holding our own.

That makes a ton of sense. And maybe just to clarify, I apologize, I'm going to sneak in one more here. But just to clarify, Dave's point on carrying costs and consumers maybe being hesitant in the off-season. That kind of sounds like a cautious or a bearish outlook as we think about retail into the fourth quarter. Is that the way I should read that?

I wouldn't say it's particularly bearish, I'll be honest with you, James, because by the time we get to the fourth quarter, we're looking at 10% of total retail. We're already at 70% of retail for the season. So I think these relatively small number issues from the consumer perspective, obviously, consumer drug retail, more of a consideration from a wholesale perspective with, I think, dealers being cautious.

That makes sense. Thanks guys.

Thank you. Our next question comes from Mike Swartz with Truist Securities. Please proceed with your question.

Hey, good morning everyone. Maybe just a broader question on affordability and how you think about that, particularly on the Boat side of the business going forward. Obviously, there's a lot of concerns near term with interest rates and affordability. But in terms of your pricing strategy for model year 2024 and I guess, longer term, how do you think about turning that or moving that more in favor of the consumer, I guess, if you do it all.

Yeah. We had pretty modest price increases in 2024, like in the 3% to 4% range was typical across. But that doesn't, of course, represent transaction prices. Transaction prices are impacted by discounts and promotional activity. And obviously, we've been upping that level. So we have a lot of tools to try and present an attractive overall proposition to the consumer. And I think you've seen the impact of that. We've been kind of trying different mixes of those things. And I think we've settled on what works pretty well currently. And you saw the rebound, particularly in Aluminum Fresh, which was down significantly earlier in the year and rebounded. I think based on the kind of raw demand, but also on the fact that we were offering, I think, attractive proposition to consumers. So I think we're back to kind of good news is back to once a year and back to very normal levels of price increase, especially when you look at overall inflation. I think the -- we do have a real advantage with the breadth of our portfolio. We have a lot of entry points for any consumer into the marketplace. So I'm happy with the brands that we have that represent different segments and kind of geographic orientations. If you look at how the market is down this year, Boats above 30 feet are really not down much top, both in kind of 16 to 24 feet the bulk -- of the bulk of the reductions. And so, that's why we've been targeting a lot of our promotions and discounts. This is really not about a kind of a uniform approach is about targeting the approach to the segment. And I think based on recent retail we seem to have found a good balance. Q – Mike Swartz: Okay. And then, just a follow-up, if I'm looking at the numbers correctly, I would assume, that Boat production in the second quarter was down year-over-year, just given the pricing benefit you have running through the line there, but EBIT margins were up, I think, 40 basis points or so. Typically, I guess, we don't see that kind of dislocation when volume is down, margins are up. But maybe help us understand why that was. Was that just positive price net pricing, or is there something else to that in the quarter? A – Dave Foulkes: Ryan might be able to be more specific here, but I think certainly the benefits of historic pricing that occurred last year flowing through to this year, then we do have pretty good mix, I think, towards some of our premium product that's probably helping. I don't know if there's anything else. A – Ryan Gwillim: Yeah. No, those are the main two… A – Dave Foulkes: Yeah. A – Ryan Gwillim: …major components. Q – Mike Swartz: Great. Thank you.

Thank you. Our next question comes from Joe Altobello with Raymond James. Please proceed with your question. Q – Joe Altobello: Thanks. Hey guys. Good morning. I think, the first question, quick housekeeping item. You mentioned earlier that the industry is trending a little bit worse than you thought, and I think your prior outlook for the U.S. industry, in particular, was down -- was units down mid-to-high single. So just to be clear, it sounds like you're thinking industry down high-singles for this year. A – Dave Foulkes: The U.S. industry, yeah, I think that's high-singles, maybe low to maybe 10, something like that. I'd say that's probably where we are. Q – Joe Altobello: Okay. And then,… A – Dave Foulkes: You bet. Q – Joe Altobello: … to in terms of inventory, I think Ryan, you mentioned that you expect us to get back to 35 weeks plus that's pretty close to where we were pre-COVID despite the fact a lot of dealers want to hold less. So is that overly optimistic or overly aggressive?

Well, I think we -- I think overall, we have more dealers for one thing. Obviously, we continue to expand our dealer base. But in terms of on hand, I think as you get lower in terms of absolute unit sales. There are some other kind of floors that come into place, and they're really around dealers really holding a representation -- a good representation of our portfolio. And that's what we tried to indicate with that histogram that I referred to earlier. We do need dealers to hold good representation of our portfolio. And so even weeks on hand could be in the 35-plus area, units will be down versus pre-COVID levels based on overall market at the moment.

Okay. And when do you think we get there?

I'm sorry, Joe, get to?

35 weeks.

So that's the year-end number.

Okay. Thank you guys.

Thank you. Our next question comes from Craig Kennison with Baird. Please proceed with your question.

Hey, good morning. Thanks for taking my question. You've had some questions on the Boat side with respect to the channel. My question is on P&A. That business has been facing a destocking cycle for some time now. How far along in that cycle are we? And might we get to the point where dealers are kind of replenishing not dealers, but your retail partners are replenishing at a 1:1 level?

It might depend a bit on the parts of the business, to be honest, Craig. But I think what we are clearly seeing Navico aftermarket and retail stabilizing and even possibly increasing. One of the reasons as we go into the season where we have Black Friday and the holiday season, dealers will begin to stock up again. So, that's a typical pattern. So, I would say for Navico the destocking has stabilize. And if anything, I would say we're going to answer a bit more restocking as we go forward. What we have seen is a really strong response to new product. So, if we launch new product as we did with the Lawrence HTS Pro, that's ahead of the competition significantly, we see no hesitation by dealers to hold that inventory. If you look at Navico overall, we -- two things are essential really for us to do with Navico. One was to get a lot of fresh products in the pipeline to support revenues and accelerated this restocking and we're beginning to do that, I think, quite nicely. The other was to get operating margins stabilize and I think we're doing that nicely too. On the Engine P&A and distribution side, I think we're coming into some easier comps in the back half of the year. So, I think you'll see kind of lower reductions there in the back half. I don't know, Ryan, if you have any comments.

Yes. The only other item would be the Brownsburg transition, which was a pretty -- it's a big task that we undertook in the first half of the year just primarily complete and running at more full speed. So that's probably hampered us a little bit in the first half more than we anticipated, but should be good moving forward. Q – : Got it. Thank you.

Our next question is from Matthew Boss with JPMorgan. Please proceed with your question.

Great. Thanks. So first, on revised full year operating margin guidance, could you just help break down the factors driving 3Q margins to attract more than 100 basis points. And then separately, just the confidence in 4Q's implied margin expansion. And as we look ahead, just help us to think about maybe early puts and takes to consider on 2024 operating margins just given your level of visibility today?

Hi, Matt, I'll start on Q3. So Q3 is off of a really strong comp last year really from all of our businesses, maybe aside from Navico Group, which actually has a bit of an easier comp. If I take it by segment, Propulsion, we anticipate to have stronger high horsepower manufacturing, which obviously comes at a good margin structure. So that would be the biggest driver there. As Dave just said, Engine P&A is coming off of really challenging first half comps, a little bit easier in the second half. So that gives us some operating margin kind of stability. The Boat Group is always a third quarter is a bit challenged, as Dave mentioned, with the model year switch over and also shutdowns in most of our facilities have fewer production days that also kind of gets better in the fourth quarter. So you get to a number that's slightly below last year, which again was kind of a bad quarter. And that leads into the fourth quarter where I think the comps get a little bit easier from prior year. Propulsion, high horsepower production continues to be strong. You have a little bit more restocking in Navico Group and Engine P&A and the Boat Group continuing to operate well. The other item I'll mention is, and we don't really talk specific brands very often, but Boston Whaler continues to have a really nice run this year. Remember, last year, we were opening up and really getting underway a brand-new facility, a second facility for the larger product. That is now behind us, and we're starting to see the benefits there. So despite lower production in terms of units, the production at Whaler and some of the premium continues to be strong, and that gives you margin benefits both in Q3 and Q4. : That’s Helpful

Thank you. Our next question is from Xian Siew with BNP Parabas. Please proceed with your question.

Hi, guys. Thanks for the question. Maybe first, can you just share how many units you shipped in the quarter? I think you sounded like it was down, but just if you have the number.

Yes, just below 10,000 -- 970-ish.

Okay. Got it. And then the minus 6% retail you sound like you were better than that internally. But is it the magnitude like half -- like I think in the first quarter, you were down 10% versus industry down 20%, something of that -- is the spread still the same? Or how do we think about the outperformance in retail?

Yeah, I would say we were quite a bit better than, I would say, than the market in the quarter and in June. So I think we had strong performance across a number of brands. I think a lot of new products supported by some, I think, very appropriate and targeted promotion side, yes, we had a good Q2 and a good June.

Thank you. Our next question comes from Scott Stember with ROTH MKM. Please proceed with your question.

Good morning. Thanks for taking my question. We talk about, I guess, Engine Parts & Accessories, you said that if you were to back out the impact from the security breach that you would have been flat. Can you maybe talk about RV versus Boat and what the Marine side would have looked like if you didn't have to contend with RV?

Yeah, I'll take that. The US products piece is primarily Marine, almost all Marine. So if you look at our comment there, that was really Scott, a fully Marine number because that is kind of captive Engine Parts & Accessories, if you would, where RV comes into play is really distribution in the Engine P&A segment as well as Navico. So products being flat in the US absent the IT is really just Marine.

Okay. Got you. And then on the repower side. Maybe talk about what you're seeing there? Your expectations if we go into a tighter Boat market, do you expect or are you starting to see people deciding that they want to repower what they have with your products instead of buying something there?

I think -- I mean, there may be some of that. I think the bigger factor is just availability of high horsepower product for repower, which is something that we've not been able to supply, more unable to supply really prior to the capacity increases that we introduced at the end of last year. So I think the repower is being -- improvements being driven more by the supply side than the demand side. There may be some demand , as you mentioned, because of people repowering versus buying new, but I'm not sure if we would be able to kind of deconflate that. I would say it's almost certainly driven by supply availability.

Got you. That's all I have. Thank you.

Thanks, Scott.

Thank you. Our next question comes from Fred Wightman with Wolfe Research. Please proceed with your question.

Hey, guys. I just wanted to come back to the Boat margin performance. Having 10% operating margins is something that you guys have really hang your hat on for a while. Obviously, the guide for this year calls for that to be a little bit lower. I'm just wondering, in sort of the out years, if you still think 10% is sort of the right margin profile of that business or if the floor is maybe a little bit lower than you had anticipated?

No, I think the -- in a more normalized market condition above 10% is very achievable. And certainly, our goal as we go out strategically, we were planning for margins significantly above 10%. It's obviously a very dynamic situation at the moment as we move from a supply constraint to demand constraint, if you look at us matching production to anticipated retail. Obviously, we're going to have to underproduce retail at some point. So I think this is a short-term dynamic that will return to a very constructive trend longer term.

And if you look at the chart that you provided talking about the dealer breakdown in terms of inventories relative 2019. Is there any commonality among those 25% of dealers, where inventories are above 2019 levels? Do they skew towards bond product category? Are they concentrated in one geography, anything that sort of stands out?

I don't think so. I think it's more statistical than category based. I don't know if anybody else's.

No, that's right. Just a lot of numbers there I would say, again, premium certainly, premium fiberglass inventories continue to be extremely low in the field. And so, most of that you would see as value-based product. But again, there's no concentration of brand or geography in there.

Fair enough. Thanks a lot.

Thank you.

Thank you. Our next question comes from Tristan Thompson-Martin with BMO Capital Markets. Please proceed with your question.

Good morning. I have two questions tied to '24 or effectively trying to look out '24. If dealers are very cautious about carrying excess inventory through the winter, how do you think they approach '24 ordering? And then also, there's a lot of moving pieces this year with the Boat kind of channel refill in the P&A destocking. Could you maybe quantify those just to give us a little bit of a better sense of what your normalized run rate is?

Yes. So on the first question. So we go through a pretty structured process several times a year with our dealers to align on restocking. And process is going exactly to plan at the moment. There are no canceled major canceled orders or anything like that. We're just kind of working through a normal process of aligning inventory levels. We don't -- I think the -- one of the considerations for us is we don't want dealers to have inventory that is not fresh. We want one of the tough products they're going to be able to sell as they go into the season. So it is in all of our interests to balance them carrying a good representation of our product portfolio with us all making sure that they have fresh product, and we don't get into the RV situation right now, where we have dealers loaded up with Euro product. So the process is proceeding exactly as it normally does every year. We're aligning on inventory levels as we go into the off-season. It's just a very normal process. We've all been through this before. This is not the first time.

Second question?

Yes. Tristan, I mean, if you want demenstralize, I mean, our P&A business is still on a kind of year-to-year CAGR since 2019 are still up 10-plus 2%, I think it's closer to 12% actually. So I mean, if you want to look at a normalized situation, that is some pretty strong growth there. I would tell you that Navico group and a normalized situation probably outpaces Engine P&A, which is a bit more annuity and more constant. So you could kind of go back and look at the trend lines there. And then the vote is really just what we've been talking about wholesale versus retail restocking story. When you -- if you are retailing 30,000, then ideally, once pipelines are filled, you want to wholesale those 30,000, so that wholesale and retail match each other. That's probably the land we're living in starting next year. And so that we're probably in a spot where, especially in value product, one in, one out retail wholesale we still catch up to do and probably a bias on growth towards the premium products. So dollars will look better than units. : Thank you. Operator: Our next question comes from Noah Zatzkin with KeyBanc Capital Markets.

Just a quick one for me. In terms of high horsepower backlog for new customers, kind of how much is left in the back half there? And how much of the remaining, I guess, Propulsion guide is satisfying existing dealers and OEMs? Thanks. A – Dave Foulkes: Yes, there's quite a bit of backlog in high horsepower still. So we are still running flat out in mercury on high horsepower, obviously, in terms of satisfying existing OEMs and dealers, that continues to be a priority, but we're gradually transitioning other customers as well. And you've seen our retail market share continue to rise as we begin to do that. So yes, we have good backlog still and continue to introduce new products to stimulate things like the 500R is a great new product that will also stimulate additional demand. So yes, the backlogs are strong.

Thank you.

Thank you. I would now like to turn the call back over to Dave for some concluding remarks.

Thank you. Thank you all for joining us. Thank you for your questions. As you've seen, despite some unique challenges in the quarter, we delivered another very solid quarter. We have very strong brands. We've continued to invest in products and technology and capacity, particularly in things like high horsepower upward and premium Boats, and those are obviously strong parts of the market right now. We're also continuing with our restructuring and cost control efforts. You've seen that particularly in the Navico Group, but of course, it's occurring across the enterprise to prepare us for some of the uncertainties going forward. It is notable, we didn't really talk about Freedom Boat Club, hitting 400 clubs is very notable, we see as a market on a journey to a much higher number than that. So that's very exciting. Continues to be a market where it's difficult exactly to predict, but we seem to be getting some relative stability. And I think that hopefully allows investors to see a bit through the short term and more to some of the really constructive longer-term trends that we see in some of the secular benefits that we have in our business, which we will talk about, and we're very excited to have you join us at our Investor Day in September in New York, but we'll provide an update on the strategy, talk about some of those secular long-term growth drivers and also have an opportunity to get you out in the water on some of the exciting new products. So we look forward very much to you joining us then. Thank you very much. Bye now.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.