BC - NYSE

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 incident was the most significant in our Propulsion and Engine Parts & Accessories segments. And because of the proximity to the end of the quarter, there was limited opportunity to recover fully within the same period. Within nine days, the company announced that all primary global manufacturing and distribution facilities were fully operational with no significant residual impacts. We have the opportunity to recover some lost production and distribution across our businesses, which will partially offset lost days in the second quarter. However, lost production days on high horsepower outboard engines will be challenging to recover because the production schedule was already full for the balance of the year. We estimate the financial impact to be approximately $80 million to $85 million of revenue in the quarter and $60 million to $70 million for the full year. I'll turn now to some of the segment highlights that facilitated a solid second quarter. Prior to the disruption from the IT Security Incident, our high horsepower outboard engine production ramp-up was progressing and has since resumed, allowing us to increase shipments to repower customers and OEM partners. Mercury Marine continues to expand outboard Propulsion and retail market share around the globe. Demonstrating the strength of our comprehensive Propulsion product portfolio. During the quarter, we launched the Mercury Racing 500R outboard, shift the first model in our Avator Electric outboard lineup to global customers and announced that we've begun serial production of the next two models. Our Engine Parts & Accessories businesses performed as expected, reflecting anticipated sales and earnings declines versus a record second quarter of 2022, although sales were up 12% versus the second quarter of 2019. Second quarter sales in the US products portion of the business were near flat to Q2 2022, reflecting strong sales growth exiting the quarter. We continue to progress the transition to the new Brunswick, Indiana distribution center. However, sales in the distribution portion of the business were down versus 2022, as dealers and retailers continue to hold lower levels of inventory, although turns have improved into the season. As foreseen, Navico Group posted lower second quarter sales versus 2022, as stocking pressure by some retail channel partners continued, but with improving trends in many retailers in the latter part of the period. Our recently launched products, including the Lowrance HDS PRO fish finder and Simrad HALO radar are performing very well in the market. Additionally, restructuring actions were accelerated, generating lower operating expenses versus prior year. Finally, our Boat business delivered double-digit adjusted operating margins for the fifth consecutive quarter despite increased promotions and discounting on select product lines and due retail continued the strengthening upward trend. Freedom Boat Club continues to experience strong same-store membership sales growth on a sequential basis and now has 400 locations and nearly 57,000 membership agreements covering 90,000 members network-wide, all while generating exceptionally strong synergy sales across our marine portfolio. Shifting to external factors. Higher interest rates and prices continue to be a headwind for buyers, particularly of smaller product with boat loan rates recently exceeding 9%. Wildfires have also impacted an already softer Canadian retail market. From a dealer perspective, sentiment remains cautious. And while inventory levels for Brunswick's channel partners are healthy, dealers are proceeding with some caution and carefully monitoring sales as they plan replenishment. Discounting and promotional activity is close to our 2019 levels and is being successful in supporting retail in the height of the sell season. Our internal voter sentiment surveys suggests boating participation remains above prior year, with Google search trends on terms related to boating also improving in June. In addition, Brunswick's Ripple both online community has now grown to more than 10,000 members. The positive retail numbers and peak season are very welcome. However, we do not see the fundamental pressures on consumers, driven by elevated interest rates and higher prices easing in the short-term. So we are taking a very balanced approach to production planning while maintaining flexibility. Shifting to a global view of revenue. Overall, we saw a 7% sales decline on a constant currency basis, excluding acquisitions, including the impact of the IT Security Incident. Year-to-date, the US market is showing relative strength versus international markets, with sales flat to 2022. From an industry view, US SSI main powerboat second quarter retail unit sales improved sequentially from the first quarter. The main powerboat segment was down 6% versus the second quarter of 2022. However, preliminary June US asset site was 2% above prior year. Brunswick performed better than industry relative to both periods, picking up share through strong performance by our premium fiberglass and aluminum brands, supported by planned promotions and marketing of select product lines. Outboard engine industry data was down 6% in the second quarter versus prior year. Mercury continues to outperform the industry with second quarter share now above 50%, reflecting retail share gains of 530 basis points in the 115 above horsepower outboard engine categories. We continue to manage inventory levels closely through the season. As we look at end of quarter pipelines, we see unit inventory levels recovered versus recent years, but still below the pre-COVID level in 2019, particularly for premium product lines. As we look at the number of units in the pipeline on a Boat per dealer basis, we see approximately 75% of our dealers with inventory levels less than or equal to 2019. Moving on to recent new products and innovation. As I mentioned earlier, we recently launched the Mercury Racing 500R, which delivers high performance for fast luxury sport boats and is incredibly light, weighing only 720 pounds. The 500R replaces the 450R and joins the Mercury Racing high horsepower lineup, but already includes the 300R and in the new 400R. Earlier this year, we launched the award-winning 7.5e Mercury Avator Electric outboard. We've now produced around 2,000 units, and we have strong orders from around the globe. We recently announced the beginning of serial production for the next two models in the Avator lineup, the 20e and 35e, which we expect to begin shipping to customers at the end of the summer. The launch of the 500R and the production of the new Avator models reinforce our intention to be the industry leader in both internal combustion and electric propulsion. Navico Group continues to release exciting new products, but also software upgrades, facilitated by the flexible Android-based software architecture deployed on its newest products and reinforcing the increasing importance of software and content upgrades as new sources of revenue and value creation for our business. Freedom Bulk Club continues to expand rapidly, recently announcing its 400th location globally, which is located in Jupiter, Florida. We've added an average of around 1 Freedom location per week since the acquisition in 2019, including 40 international locations. We're also continuing to build out the Freedom ecosystem, including successfully expanding our Boateka pre-owned boat business, we takes boat from Freedom, refurbishes them and resell them into the pre-owned market. I'll now turn the call over to Ryan to provide additional comments on our financial performance and outlook. <> Thanks, Dave, and good morning, everyone. As previewed last week, Brunswick delivered a solid quarter despite the impact of the June IT Security Incident. When compared to prior year, second quarter net sales were down 7% and adjusted EPS of $2.35 decreased 17%. Net sales benefited from pricing implemented in previous quarters and new product performance, offset by lower production and shipments resulting from the IT Security Incident primarily in the Propulsion and Engine P&A segments and softer market conditions in value Boat and lower horsepower engine markets. Adjusted operating earnings and margins were impacted by lower sales and slightly higher input costs versus the second quarter of 2022, but were partially offset by benefits from prudent cost containment efforts across the organization. Lastly, we had strong free cash flow generation in the quarter of $193 million primarily due to stronger working capital generation, resulting in free cash flow conversion of 116% in the quarter. Year-to-date results also remained solid despite a slightly softer marine retail market and the impacts of the IT Security Incident. Sales are down slightly from the record first half 2022 with the resilience in adjusted operating margin and EPS resulting from prudent operating expense control across the company, steady gross margin performance and in the case of adjusted EPS continued aggressive share repurchase activity. You'll also note that each measure is greatly improved versus 2019, a testament to our continued successful portfolio management, operational excellence and capital strategy execution. Now we'll look at each reporting segment, starting with our Propulsion business, which delivered resolute sales and earnings despite being the segment most impacted by the IT Security Incident in the quarter. Revenue decreased 4% versus the second quarter of 2022 and as benefits from pricing, favorable product mix related to continued strong high horsepower outboard engine demand and high sales to repower customers were offset by the impact of production stoppages and planned reductions in lower horsepower outboard engine and stern drive engine sales and production. Adjusted operating margins in the quarter were down 300 basis points as lower sales, higher input costs and the timing related to capitalized inventory variances, which you'll remember was an equal benefit in the first quarter, offset very aggressive cost control. Production output of high horsepower engines continues to improve, which should enable second half sales growth. The Engine Parts & Accessories business delivered a steady quarter, with sales down 13% versus 2022, but up 12% over the second quarter of 2019. Sales in our US products business decreased by 8.5%, but would have been essentially flat versus the second quarter of 2022, absent the IT Security Incident. Sales in our distribution businesses and international markets remained below prior year. Adjusted operating earnings and margins decreased due to the same factors, together with slight increases in input costs and the carryover of start-up costs related to the newly opened Brownsburg distribution center, which collectively offset benefits from cost control measures. Note, that July orders in the products business continued to trend positive as boat usage remains strong. Navico Group reported a sales decrease of 20%, driven by lower orders versus a very strong second quarter of 2022, together with slow recovery of RV OEM production, partially offset by strong new product performance. Segment operating earnings declined as a result of the lower sales and slightly elevated input costs, partially offset by accelerated cost reduction actions and reorganization efforts. Note, that adjusted operating margins improved sequentially by 40 basis points versus the first quarter with second half operating margins anticipated to exceed first half performance. As we look to the remainder of the year, orders for the aftermarket channel, which represents two-thirds of Navico Group sales are showing strength versus the back half of 2022, as retailer inventories are more normalized versus this time last year and sell-through demand continues to be solid. We believe this tailwind will help offset potential lag in marine OEM and RV orders, as wholesale production in these areas are slower as manufacturers and dealers monitor inventory levels late in the season. Our Boat segment had another strong quarter, delivering steady top line and slight earnings growth together with double-digit adjusted operating margins for the 5th straight quarter. The $62.5 million of adjusted operating earnings in the second quarter is the highest earnings achieved in any quarter in Boat Group history. The Boat segment reported a 1% decrease in sales due to the favorable impact of prior year pricing actions and favorable mix towards premium products being offset by lower shipments of value products and higher discount levels, which are still within expectations. Adjusted operating earnings growth was enabled by the above factors coupled with share gains and sustained operational productivity gains. Freedom Boat Club, which is included in business acceleration, contributed approximately 7% of the Boat segment's revenue during the quarter. Our updated 2023 outlook matches our preliminary outlook shared last week. We are reiterating our full year adjusted EPS guide of approximately $9.50, with revenue of between $6.7 billion and $6.8 billion and adjusted operating margins of approximately 14.5%. We continue to see positive free cash flow conversion and working capital trends and still anticipate generating more than $375 million of free cash flow for the year. Finally, we anticipate a solid third quarter where revenue should be flat to slightly below Q3 of 2022 and adjusted EPS of between $2.35 and $2.45. This slide provides additional clarity on the components of our updated EPS guidance. The midpoint of our prior EPS guidance range was $10.25. The components to get to our updated guidance of approximately 950 are with each of the following being estimates. $0.35 of loss in non-recoverable earnings related to the IT Security Incident, primarily related to the downtime of high horsepower outboard engine production and less Engine P&A sales in the middle of the Marine retail season. $0.65 related to channel and market dynamics, where despite the US retail market being only slightly worse than our initial expectations, channel partners across our businesses are being cautious regarding pipeline refill given the uncertain macroeconomic environment and continued pressure on consumers domestically and in many international markets. As we're working toward the end of the prime retail season in Northern climates, we anticipate lower channel fill in the back half of 2023 in the face of these pressures and in uncertain 2024. Specific examples may include boat dealers taking fewer value boats at the end of the season, boat OEMs being satisfied with their ability to get 150-horsepower and under engine product and having sufficient supply to satisfy late-season boat orders and the marine dealers and retailers restocking Parts & Accessories at a more reserved pace. And lastly, a $0.25 benefit from strong OpEx control, including acceleration of planned Navico Group integration and restructuring activities, benefits from new products and lower share count resulting from aggressive repurchases. Note that in an adjusted EPS of $9.50 would still be 15% higher than any result in Brunswick history aside from 2022. Lastly, we have a small handful of full year assumptions that we have updated. First, given our strong cash performance and continued Brunswick share price dislocation, we are increasing our repurchase target to exceed $250 million of repurchases for the full year. Accordingly, our average diluted shares outstanding should be slightly lower for the year at 17.5 million shares. We're also seeing a slightly better foreign currency environment as it relates to our global businesses and now anticipate a full year headwind of approximately $30 million. Please see the appendices of this presentation for additional information on other P&L and balance sheet assumptions for the year, which have not materially changed. I will now pass the call back over to Dave for concluding remarks. Dave Foulkes Thanks, Ryan. Before we close out, I want to share an update on some recent awards and recognition for our company, brands, products and people. We recently issued our sustainability report, and we're delighted to be named by USA today to the inaugural list of America's Climate Leaders for 2023. We were among the 400 companies that made the final list out of the 2,000 considered. Brunswick was also named to the US News & World Report’s list of Best Companies to Work For, for 2023, 2024. We finished in the Top 10 of all companies in the categories of best companies for work-life balance and quality of pay. Mercury recently won four iF Design awards for its new products, including two awards for the Avator 7.5e and one each for our V10 and V12 outboard engines. The iF Design awards are one of the most prestigious international design awards crossing all business sectors. In May, Brunswick received a record 11, 2023 top product awards from Boating Industry Magazine, recognizing innovative industry-leading new products from Mercury Marine, Brunswick Boat Group and Navico Group; and four Brunswick female leaders were named by Boating Industry Magazine to its 2023 list of Women Making Waves, marking the second consecutive year that four of our outstanding women leaders have featured on the list. Before I close, I'd like to remind you about our Investor and Analyst Day event on September 18, 2023, at the New York Stock Exchange, which will be followed by an opportunity to experience exciting new products and technologies from across our businesses on the water, as well as meet with members of our management team. Thank you for joining the call. That concludes our prepared remarks. We'll now open the line for questions.

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.

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.

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.

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

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.