BC - NYSE

Good morning, welcome to Brunswick Corporation's Third 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. You may begin.

Good morning, and thank you for joining us. With me on the call this morning are Dave Foulkes, Brunswick 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 section 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 delivered solid results in the quarter as continued market share gains, wealth of new products, and expanded contribution from recurring revenue businesses resulted in financial performance in line with expectations despite the challenging marine market. We continue to tightly manage field inventory across all our channels and have adjusted production accordingly, ending the quarter with 10,700 units in the U.S. pipeline, around 200 units below prior year. Our third quarter results again demonstrated the resiliency of our portfolio with our recurring revenue businesses and channels, including our engine P&A business, Propulsion's repower business, Freedom Boat Club, and Navico Group's aftermarket sales contributing nearly 70% of our Q3 adjusted operating earnings. As we enter the final months of the year, we estimate full year new boat retail unit sales to finish in line with our expectations of down approximately 10% versus prior year. With the core retail selling season behind us and retail discounting levels remaining elevated, dealer reordering in some segments is slower than anticipated, leading most boat OEMs to maintain lower production rates, impact the propulsion and Navico Group OEM orders. However, our aftermarket based engine parts, accessories and distribution businesses, and Freedom Boat Club continue to perform well as boating participation remains strong. Prudent capital management remains a priority and we recently executed an amendment to our revolving credit facility, increasing the commitments to a billion dollars and expanding the maturity to October, 2029. We also increase the size of our commercial paper program, committing the issuance of commercial paper notes also up to a billion dollars to provide further capital flexibility. In addition, our businesses delivered strong cashflow enabling us to complete $190 million of share repurchases year to-date and maintaining our commitment to return value to shareholders. Turning to some highlights from our segments in the quarter. As anticipated, our propulsion business delivered lower sales and operating earnings versus the third quarter of 2023, but we continue to outpace the market at retail and gained 420 basis points of U.S. outboard engine share in the quarter. We are currently producing at rates significantly below retail as OEM customers maintain reduced boat production schedules into the off season. Our engine parts and accessories business had another strong quarter with record operating margins of 26% and with both the product and distribution businesses contributing to margin expansion despite slightly lower sales. The completed transition of engine parts and accessories distribution to our new state-of-the-art facility in Brownsburg, Indiana continues to provide efficiency and delivery time benefits enabling modest international sales growth versus the prior year quarter. As anticipated, Navico Group had lower sales and operating earnings versus the third quarter of 2023 due to continued soft marine OEM order rates and retailers delaying aftermarket orders until closer to the holiday selling season which was partially offset by slightly higher sales in the Europe, Middle East and Africa region. Our pace of product investments is showing benefits including at the recent Cannes Yachting Festival where Navico Group's products were present on approximately 70% of books exhibited. I'll provide more details on Navico Group new product introductions in a moment. Finally, our boat business had sales and operating earnings below the third quarter of 2023 consistent with lower planned production levels and fewer manufacturing days due to the extended summer shutdowns. Freedom Boat Club continues to deliver steady performance with 3.5% year-to-date membership sales growth. In addition, we completed the acquisition of the South Florida Franchise Operations and Territory further solidifying Freedom's leadership position in the largest boating states in the U.S. We expect to enter the Asia market in the near future. Navico Group is continuing to invest in an accelerated introduction of new products developed since the acquisition. The Elite FS 10-inch and 12-inch fishfinders with live sonar and full networking capability will launch today to fulfill the needs of consumers who desire larger screens with premium features at an affordable price. These products are amongst more than 20 new products introduced across the Navico Group portfolio year-to-date. Some of these new products are launching in time for the e-commerce and holiday season and we expect them to contribute to some operating margin re-expansion in the fourth quarter, while a number of white space products opening expanded market opportunities. In the third quarter, we launched the new Lowrance Eagle Eye 9, the first entry-level fishfinder in the market to offer live sonar capability. Even as we continue to rationalize its global footprint, we're also continuing to build Navico Group product development capabilities and expect to launch an additional 20 exciting new products over the next three quarters. Turning to external factors, while the macroeconomic landscape is stabilizing with inflation continuing to moderate and employment generally remaining solid, we continue to monitor the escalating geopolitical tensions and election-related activities. The downward movement in interest rates in the U.S. and some other markets since the beginning of the quarter is welcome and is already benefiting consumer financing costs and dealer floor plan costs. However, given the points in the current retail selling season, we do not anticipate benefits until 2025. Dealer sentiment is generally stable but negative with ordering remaining cautious in most segments. We do not anticipate any significant change entering the off-season curtailment holiday. Discounting and promotion levels remain elevated. However, our investments in our digital assets continue to drive solid lead generation and conversion. Despite these challenging conditions, our surveys do show some improvement in bulk purchase consideration, particularly among higher household income consumers. 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. As we all know, at the end of September and early October, Florida and the Southeastern U.S. experienced two major hurricanes. While Brunswick has a strong presence in Florida, it was only a minor direct impact to our facilities, both production and distribution halted at some locations for approximately three days for hurricane preparation and in a few cases for power outages. Brunswick supplies in the region were also largely unimpacted. Of the approximately 100 corporate and franchise-owned Freedom Boat Club locations in Florida, only four will remain closed for infrastructure repair exiting October. Some Brunswick channel partners incurred damage to their facilities which in combination with direct impacts to boaters and consumers in the area will have a modest short to midterm impact. We estimate a full-year operating earnings impact of $5 million to $10 million. Brunswick is providing financial support, supplies, and essential needs to impacted employees and communities. Moving now to U.S. industry retail performance. U.S. outboard engine industry retail units declined 10% in the third quarter versus prior year, with Mercury Marine outperforming the industry at down just 1.8%. As mentioned, Mercury Marine continues to gain share delivering approximately 50% U.S. outboard engine market share in the third quarter. We are diligently monitoring boat pipeline levels and continue to undership retail exiting the third quarter with 10,700 units in U.S. pipeline slightly below prior year. We ended the third quarter at 32 weeks on hand with premium fiberglass pipelines remaining well below historical levels. I'll now turn the call over to Ryan to provide additional information on our financial performance and outlook.

Thanks, Dave, and good morning, everyone. Brunswick's third quarter results were in line with expectations but remained below prior year due to the continued challenging U.S. retail marine market. Versus the third quarter of 2023, net sales in the quarter were down 20%, with adjusted operating margins of just under 10%, resulting in an adjusted EPS of $1.17. As mentioned, our results in the quarter again demonstrated the resiliency of our portfolio with our recurring revenue businesses and channels contributing a significant portion of the operating earnings this period. Third quarter sales were below prior year as the impact of continued lower wholesale ordering by dealers and OEMs, combined with higher discounts in certain business segments, was only partially offset by annual price increases and benefits from well-received new products. Operating earnings were down versus prior year as a result of lower sales and the impact of lower absorption from decreased production levels, partially offset by new product momentum, annual price increases, and ongoing cost control measures throughout the enterprise. On a year-to-date basis, sales were down 19%, resulting in an adjusted diluted EPS of $4.31, down 41%. Gross margin performance remained steady despite the top-line softness, while operating expenses are down more than $15 million versus 2023 levels, even after absorbing the impact of acquisitions, as the entire enterprise remained focus on reducing considerable cost. As a reminder, we are making conscious decisions to ensure field inventory levels for all our businesses remain appropriate and have scaled production accordingly. Year-to-date production for outboard engines, 75 horsepower and above is down 29% versus 2023, with boat production down 34%. Now we'll look at each reporting segment, starting with our propulsion business. Sales in our propulsion segment were down 32%, with lower production rates at OEM boat manufacturers, resulting in lower engine orders in the quarter versus the prior year quarter. As Dave mentioned earlier, despite lower wholesale orders, as we anticipated, we continue to take market share and outpace the overall market performance. Adjusted operating margins were below prior year, primarily due to the impact of lower net sales and lower absorption from declines in production, partially offset by cost control measures. Our aftermarket-led engine parts and accessories business had another strong quarter, with record adjusted operating margins leading to strong operating earnings growth versus the third quarter of 2023, despite slightly lower year-over-year sales. The completed transition to our new state-of-the-art facility in Brownsburg, Indiana, continues to provide efficiency and delivery time benefits, which enabled modest international sales growth versus the third quarter of 2023. Our U.S.-based land and sea distribution business also continues to take market share, gaining 60 basis points of share in the last 12 months, culminating in September, where they delivered their highest-ever single-month market share of just under 50%. Navico Group reported a sales decrease of 14%, primarily driven by reduced sales to marine OEMs, resulting from lower boat production levels to match retail ordering patterns, partially offset by slight international sales growth and strong new product momentum. Segment operating earnings decreased as the impact from lower sales was only partially offset by lower operating expenses. Finally, our boat business had sales and operating earnings below the third quarter of 2023, consistent with lower planned production levels and fewer manufacturing days due to the annual summer shutdowns. Sales were down 19%, resulting from lower wholesale orders, as channel partners continued to order cautiously, and higher incentives and discounting were only partially offset by the favorable impact of modest model year pricing. Segment operating earnings were within expectations as the impact of net sales declines and lower absorption from the reduced production was partially offset by pricing and continued cost control. Freedom Boat Club, which contributed 12% of the segment sales in the quarter, continues to deliver steady membership sales growth and completed its acquisition of the Southwest Florida franchise operations and territory, further solidifying its leadership position in the largest boating state in the U.S. Turning to guidance, we are not anticipating any change in market conditions for the fourth quarter and are responding by continuing the moderate production to ensure inventory levels in the channel remain appropriate, setting us up for what we anticipate as a stronger 2025. In addition, we anticipate boat dealers remaining cautious in taking on product before early 2025 boat show season, especially knowing that we have manufacturing capacity available to get them product early in the 2025 retail season, similar to our own boat business, OEM customers of Mercury and Navico Group, to moderate production, resulting in softer wholesale conditions. As Dave discussed earlier, a modest negative earnings impact from the hurricanes that impacted Florida and the Southeast U.S., our recurring revenue businesses continuing to remain steady, albeit with normal seasonality impacting sales volumes, and lastly, Q4 production continuing the trail of 2023 levels. The result is the guidance you see on this slide, including net sales of $5.1 to $5.2 billion and adjusted diluted EPS of approximately $4.50. Free cash flow continues to be solid despite the lower earnings, with free cash flow conversion expected to be north of 80% for the year. I will now pass the call back today for concluding remarks.

Before we conclude, despite the challenging market, I am thrilled to highlight the exceptional accomplishments of our teams from across the enterprise that were recognized with a record high number of awards in the third quarter. We have now surpassed 100 major enterprise awards for the third consecutive year. Brunswick was named one of the World’s Best Companies by TIME Magazine and we continue to win global awards for our products around the world. Sea Ray won the Moteur Boat Magazine Moteur Boat of the Year Award for its new 190 SPX model. Moteur Boat is the largest marine publication in France. Also, Flite recently took home four Australian Good Design Awards including a Best-in-Class winner for its Marc Newson collaboration. During IBEX in October, Navico Group won the IBEX Innovation Award in its category for the Lenco Pro Control Boat Stabilization System and Mercury received an honorable mention in the same category for its new Precision Joystick system. And finally, safety on and off the water remains our top priority, so it was very rewarding to receive four National Boating Safety Awards, two for our Boat Class business, and one each for our Freedom and Bayliner brands. Finally, we are very excited about the upcoming Ft. Lauderdale Boat Show at which we will be debuting many industry-leading, new products. Boston Whaler will launch the all new 330 Vantage, the new flagship model in the popular Vantage series. Sea Ray will show three all-new models in its SDX line, all powered by Mercury outboard engines. And we will officially debut the first models in our new Navan premium adventure product line in the U.S. Thank you for your attention. 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 is from Matthew Boss with JPMorgan. Please proceed.

Great, thanks. So maybe first question, Dave, could you speak to any changes in customer demand or any changes in dealer sentiment that you've seen recently? And just if you could elaborate on the drivers of the stronger 2025 setup that you cited?

Yes. Thanks, Matthew. So I think retail is pacing pretty much as we expected to down about 10%. September for us actually came in a little bit stronger, so that was nice to see. But generally, that minus 10% at a consumer level is what we're seeing. I wouldn't say that there are wholesale changes in OEM demand kind of across the board. But we are seeing a bit of weakening in Europe, which has held up a bit better. That tends to be a little bit more of a premium market, certainly for us. There's some weakening there. And we did want to de-risk a bit the balance of the year, just because we have just not quite got under some of the OEM kind of pipeline dynamics previously. So I mean, you've seen, you know, even in some public companies, some changes in kind of the dynamics that you'd expect for the balance of the year. So while we're not seeing significant further production reductions, I think this is a bit more of a de-risking exercise for the balance of the year. One thing that is clear at this point in the year is that we do not want to overstock pipelines. And so we're not intending to do kind of a lot of year-end programming that would potentially pull wholesale out of early 2025 and into 2024. So those are some considerations. There will be a modest impact from the hurricanes that went through Florida. Obviously, there are a number of people that were affected, and we all hope that they recover very quickly. But we would expect some kind of west coast of Florida demand impacts based on a hurricane impact on our channel partners and also on end consumers. Do you want to talk about -

Yes, I'll take '25. Good morning, Matt. How are you? Its Ryan here. '25, I think our story is pretty similar to what it was on the July call, maybe just moved up 90 days or so. We still think that 2025 on balance is likely to see healthier economic conditions for our consumers, lower interest rates, unemployment that continues to be relatively low, GDP that is continue to be positive. Obviously, a little bit of uncertainty here in the next 90 days, certainly with the election, maybe extending into the first quarter, but all-in-all macros and consumer probably in the plus column. And then you have to ask yourself what you think the market's going to do, the marine market. We're going to end the year this year at about 140,000 units here in the U.S., which is really only about a handful of percent above where we were on a unit basis coming out of the GFC. And so we all think it's relatively reasonable to assume that a flat market to this year is definitely doable with probably an upside from there. And then time will tell what that looks like, low single digit, mid single digit, but certainly probably a little bit biased to the upside from a market. Certainly, when you look at retail being about 50% of replacement level, which it continues to be at. And then you add into a positive pipeline dynamics. In most scenarios, even in a flat retail market next year, we would assume that wholesale would be up for us in both boats and engines. And again, how much up would depend on where it lands at the end of this year and what you think retail does, but we still think wholesale would be up. And then lastly, I'd say that there's a few things that Brunswick just is unique on. We have market share gains with Mercury, with new products on the horizon, continued stable growth on engine P&A. I don't think we talk about it enough or give it enough credit. This is a business that had 26% operating margins in the quarter, a record, and continues to drive recurring after market earnings and revenue for us. That will continue to drive stability next year. Significant new products, you've heard from Dave on things that are just coming out over the next handful of months, and that will continue into next year. I think we've taken $100 million of OpEx out from our original budget this year, and we're down $50 million year-to-date. And that's including absorbing about $20 million of acquisition impact. We'll be able to keep a portion of that out. Obviously, some things will come back in, including reset of comp, a tariff environment that may be a little worse, but on balance, still good from a cost perspective. And then we continue to drive cash. I think a lot of the things we're doing here in the back half of 2024 will give us cash benefits this year, but also cash benefits next year, which will be helpful certainly in whatever environment that's thrown at us. So on balance, I do think there's more reasons to think that 2025 is a growth year for us. So on EPS I think it would be second half based and second half loaded as comps get a little easier and the economics of the health of the consumer seem to be better, but that's still our heads at that 2025 is a growth year off of 2024.

Great. And then maybe Ryan, just to follow up. So on a flat retail sales backdrop for '25, how are you thinking about pricing and promotional landscape and any change to 20% incremental margins as we think about the front half versus the back half loading?

Yes, Matt, I would say that your incrementals or your leverage will be better in the second half, certainly, just the way that the calendarization of earnings would likely go versus 2023. But from a pricing standpoint, we are still planning very modest pricing increases across our portfolio. That would be the third year in a row that we've done very modest increases, both boats and engines and the price to our end consumer continues to be helped by elevated discount levels as well. So you can have a lot of places where the price of the consumers paying for the same product is actually equal to or even less than what it would have been or what it was 12 months ago because of discounting. So we will take a little bit of price at wholesale, but it will be very, very modest.

Great. Best of luck.

Our next question is from James Hardiman with Citi. Please proceed.

Hey, good morning, guys. So great line of questioning there and I think some great answers. I wanted to dig in a little bit more on the inventory piece. So it seems like retail is playing out largely as you anticipated 90 days or so ago. And yet we've got a pretty steep cut to the fourth quarter. So should we interpret that as you expect to finish the year even lower on inventories than you previously did? I think there was some discussion about a 1500 unit reduction per the year. Where does that number stand today? And I think the answer to this is yes, based on what you said in the previous response, but one-to-one wholesale to retail is the general sort of assumption for next year as we sit here today?

Yes, James, this is Ryan. I think that's a good assumption to start the year. You are correct on your global boats being wholesale exceeding retail by about 1500 units to about 1000 in the U.S. So pipelines, we -- wholesale trailing retail about 20,000 units on the engine side in the U.S. Just as another number. So I don't think there's been any change really in our view on pipelines except to make sure that we're balancing with a retail environment that's shaping up as we anticipate. The real change, as Dave said, is I think the last quarter is going to be just very cautious in terms of orders from our channel partners across the entire product display. We're just seeing cautiousness, because we have the ability to get them product quickly. We can get folks products here in the beginning of the retail season. If boat shows end up outperforming maybe initial expectations, we can get boats out quickly in the beginning of the year. So all of that is leading to just cautiousness in our channel and we'll be ready to supply products once the orders come in.

Understood. And then to the question on 2025, sounds like you're confident that you'll be up next year on an earnings basis. I think you're pretty confident about that three months ago. Now '24 has come down, call it $0.75. And so I guess I'm trying to think through, should we be lowering them? Is the view on 2025 today any lower than it was three months ago? Or how should we think about that in light of the cut to '24? Does that impact '25 in any meaningful way?

Yes, I think one way to think about it is that in the end, retail is what matters. Wholesale is a dynamics issue year-over-year, how we build pipeline, how we complete pipeline, all those things. Retail in the end is what matters. And I think to some extent you could say that if we get out of the situation of promoting products to get the sales in, then hopefully we'll pick up some sales early next year that might have occurred in this year, which will help the year-over-year a bit. But I would anchor back to what retail is in the end. I think we have a decent expectation that retail will be flat. And pipelines really are incredibly low at the moment, and have been going down and down and down. And we've been fighting probably more with -- certainly a bit with the retail dynamic, but probably a bit more with the wholesale dynamic than we have with retail. So as long as retail holds in, I think there's every reason to believe that the balance of probability is that they'll be constructive for EPS.

Got it. Thank you very much.

Our next question is from Megan Alexander with Morgan Stanley. Please proceed.

Hi, good morning. Thanks for taking our question. Maybe just to follow up on James's question there, just to clarify, are you still expecting global weeks on hand to finish this year at I think around 40, which is where you were thinking last quarter? And maybe you can tell us where that is today?

At the end of the quarter, I think it's 32 weeks we came under the quarter.

Yes, 32 in the U.S.

32 in the U.S. will probably end up in the high 30s by the end of the year. I think the exact weeks on hand is getting a bit more difficult to predict because the unit implications of one week on hand is now like two or three hundred units. So I would just say that it remains in the high 30s in the U.S. And probably pipelines are always a little bit higher in Europe, particularly in some other regions. So we'll probably end up in the 40-ish range globally. Yes.

Right. So just to clarify, that hasn't really changed. You're thinking around pipelines and weeks on hand hasn't really changed since last quarter?

No, I think that's correct. I think that we're -- we continue to be focused on setting up for 2025. And we'll make sure that we continue to monitor. And obviously we're trying to de-risk the rest of the year in every way that we possibly can. And if retail, I mean, we're essentially, probably 90% through the retail, probably 95%, no, more than 95% through retail, probably close through retail. So, yes, retail impacts are going to be pretty modest from now on. So we'll just continue to modulate production. Maybe one point would be obviously we talk about weeks on hand, which is a kind of global number. And it's not as though inventory is kind of homogenous and fungible. It isn't. We are still historically low on imagery levels for premium product. So there is still some room to go with building premium products up to a level that we'd be probably more comfortable with as we go into 2025. But for our value and kind of core product, I think we are where we want to be.

Got it. And maybe I know this question's been asked in the past, and maybe you can just help me understand a little bit more of if you're ending high 30s, I think that's maybe where it used to be, not any worse. So in order for wholesale to be above retail next year, that seems to imply that weeks on hand are going up or would go up. Am I thinking about that the wrong way? Can you kind of just help square why you think that there could be the potential to ship ahead of retail in 2025?

Yes. I mean, we produce -- I mean, retail will be down about 10% this year. Our wholesale is down 25% to 30%. Production's down about 30%, wholesale's down about 25%. So for flat retail next year, we'll need to reaccelerate so that wholesale would be, for example, at the down 10% level. I mean, not down next year, but basically equal to retail would require a reacceleration of wholesale. And we're down. So when we continue to manage down, I think we have about 13,000 units in the pipeline, the end of this year versus closer to 14,000 last year. So we have some production catch up to do and some inventory catch up to do.

Yes. Just to be very clear, Megan, the comment was that next year, wholesale in '25 could be ahead of wholesale in '24, not that wholesale in '25 would be above retail in '25. That would be unlikely. I think the main point, as Dave said, is wholesale trails retail by a significant amount this year. And if we go one in one out next year for making retail equal wholesale, that would mean wholesale gains. So just want to be very clear. We would not anticipate weeks on hand increasing next year.

Yes. Okay. That's helpful. That makes a lot of sense. Thank you.

Our next question is from Fred Wightman with Wolfe Research. Please proceed.

Hey guys, I just wanted to touch on the Mercury share gains. I think you said that you gained 400 basis points in the quarter. I'm wondering if there's anything one time in there to call out or not?

Yes, I would say it was a good quarter for us, but I would say the 130 basis points here today is the thing to focus on. Really, we mentioned that in this environment there are a lot of unusual dynamics as OEM production modulates to protect inventory and other things in the balance of the year. So obviously it's really exciting when we see numbers like 400 basis points and we have a great product line, especially since our competitors have launched some product in the last year or so. It's nice to see us continue to do well on share. We expect to continue to do well on share at the upcoming Fort Lauderdale Boat Show, but I would probably anchor a bit more on the 130 basis points year to-date.

Okay, that's fair. And shifting to Navico, Ryan, I think you said that you're expecting that to be up year-over-year in the fourth quarter. And I know that there's been some timing shifts just from a retailer aftermarket perspective with the holiday, but do you think that that's a big inflection? Do we feel like things have sort of stabilized or bottomed out there and should we be positioned for growth into the future as well, or is that not the right way to think about it?

No, I think that's fair. And Fred, I don't think it's a huge inflection. I mean, Navico has showed some stability across the board. You saw some really actually pretty stable aftermarket sales in Q3. The OEM side, both Marine and RV does continue to be down, which should be surprising given the OEM sluggishness around the rest of the portfolio. But Q4 has the opportunity to be kind of marginally up in sales and delivering better earnings and better margin. I think the new products are really what drives the Navico success from here on out. It's not going to be overnight. It's not going to be immediate, but the additional new products that continue to come out certainly ahead of Black Friday, which for Navico will be an important milestone, does give us some confidence in the fourth quarter. But I wouldn't expect a huge inflection, but certainly stability, quarter-over-quarter growth on top line and earnings and margin from third quarter to fourth quarter would be fair to expect. And then from a year-over-year comparison, probably a little bit of the same, although the fourth quarter last year is obviously a tougher comparison than third quarter of this year.

Fair enough. Thank you.

Our next question is from Craig Kennison with Baird. Please proceed.

Hey, good morning. Thanks for taking my question. Dave, you mentioned a survey that you conducted with boat consumers. I'm just wondering if you could shed some light on any more details about purchase intent, and I'm curious how predictive that survey has been in the past.

Yes. Hi, Craig. Yes, we do monthly surveys of around about 400 boaters and intending boaters, and we understand what their demographics are. So we try and look at patterns of behavior. We asked them a number of questions about what's influencing their behavior. And this time I think we saw a kind of core and value boaters. Purchase intent remains stable, but higher household income go up. I don't offhand have exactly the kind of percentages with me. I would say that there's clearly going to be some element of latent demand building at the moment, but people are just on the fence this year, contemplating higher interest rates, contemplating uncertainty in the trajectory of the interest rates, contemplating the election outcomes and other things. So I do think once we get on the other side of that, we will see some latent demand, and I would expect that to come through first in the more premium segments, which is essentially what we're beginning to see. So, possibly the more positive sentiment was driven by the third quarter interest rate cuts. The 50 basis point cut has translated to about 100 basis points of cuts in both financing rates. So loans over $100,000 now are down to about 7.5%. They were in the 8.5% to 9% range previously. So we have seen good things generally happening in terms of financing costs, and then obviously there are additional promotions available. So we are excited about Fort Lauderdale coming up. That's a premium show, and it'll be good to see how consumers behave at that show.

Thanks, Dave.

Thanks, Craig.

Our next question is from Mike Swartz with Truist Securities. Please proceed.

Hey, guys. Good morning. Maybe just first question, and I think you've talked about this a number of times, but the engine parts and accessories business, the big step up in operating margin in the quarter, I think you called out it's the highest quarterly margin in company history. But can you just give us a sense of, I guess, how much of that is sustainable? I know there's a lot of seasonality here, so I don't expect 25%, 26% margins every quarter, but just give us a sense of how much of that is sustainable, structural versus maybe there's some interquarter, one-time-ish type things that you saw?

Yes, Mike, I'll take this one. Yes, obviously great quarter. Just highlighting the stability here of this business. I do think this is a business that's marched right up to 20% operating margins for the full year. And obviously, that's a pretty good milestone. A lot of it just depends on mix within the distribution versus product side. Obviously, the products part of business holds some really strong gross and operating margins. And distribution, although it's a pretty strong third-party distribution business, it is still third-party. So it's a sell-through business where margins are lower. A lot of the quarterly dynamics depends on where you stand from a distribution versus product mix standpoint. I will say the one thing that's really shown through is the transition to Brownsburg, Indiana is complete, and we are now getting more products out quicker at a better cost. And all three of those things are beneficial to margins, right? More products out quicker and being able to go around the world solely to our international customers. So yes, it's fair to say you're not going to see 26% every quarter, but certainly where there's value, we now know that we can get the product out at the right cost and get it out quickly so that our channel partners have what they need. So you should anticipate continued margin stability and growth there as we go into '25.

We've taken quite a bit of cost out of that business. It's very efficient. I would say that maybe the weather in the late summer and fall has been pretty nice. And actually, even in October, we're seeing some really good boating activity. So that's possibly a part of a boost as well.

Okay, great. And just following up on, I think, Ryan, you had mentioned before you've taken out about 100 million costs from business this year. How much of that should we expect to come back in, let's say, a flattish retail environment?

Yes. And 100 million versus our initial budget, right? So the number to think about from 2023 is more like 50 or so. But again, that's absorbing 20 of OpEx from Flite and Freedom Boat Club deals that were completed in '23 and we have the cost in '24. I would think that you could keep 30 to 40 million of the OpEx as stays out until further notice. Now, these are things that we would like -- a lot of them are things we'd like to add back in over time. Its things that make the businesses run better, whether it's IT, more sales and marketing support. So it's not like we'd like it out forever. But certainly, as you look at early '25 and early '25 in general, 30 to 40 million of that can stay out until the market picks back up and we're able to generate more sales and cover those costs.

Okay, great. Thank you.

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

Hi, guys. Thanks for the question. I wanted to ask on the 4Q propulsion margin seems like implied to be pretty low relative to the historical. I'm just curious on what's kind of driving that step down in propulsion margin next quarter and how you think about, I guess, the bounce back next year or potential bounce back?

Yes, I think volume's going to be down like 25% year-over-year. So absorption is going to be a big component of margins there. I would say that mix is generally staying and holding in pretty well. So probably absorption is the biggest component of that.

It definitely is. And we were still filling pipelines of 175 to 300 horsepower in Q4 of last year. We're one in, one out with retail this year. So that's the other main driver. But production and funk like rightfully down significantly in the fourth quarter because we want to protect an inventory level and be ready for '25. And that does carry with it negative absorption that's hard to overcome when you don't have the volume.

Yes, on a more positive note there, you can't take headcount out exactly when you want to take it out. It takes a little bit of time. So, some of the headwinds here are trailing headwinds that won't recur in the first quarter of next year, for example, when the headcount will be out. So there's a little bit of a transition element in here that makes absorption incrementally worse than it might have been had everything been kind of instantaneously corrected for low volume.

Okay, got it. And then on Europe, I think you mentioned weeks on hand are a bit higher internationally and you saw a bit of a weakening there. Any kind of thoughts on where you would like to take, I guess, international pipelines and do we need to kind of de-stock further maybe into next year?

International is always a little bit higher and we are doing exactly the same thing for Europe that we're doing over here in terms of controlling our pipelines to the overall right levels. If you think about the, I mean, in Europe, in the U.S., we produce a lot of our product close to where we sell it. In Europe, that's not quite such the case. So we just have a lot more inventory around just for transit and other things. So we're not in an unusual situation on pipelines, but continuing to take the right level of action.

Okay, thanks.

Our next question is from Joe Altobello with Raymond James. Please proceed.

Thanks. Hey guys. Good morning. Just want to go back to inventory for a second. I think you mentioned you're at 32 weeks here in the U.S. and year-end you're expecting to be high 30s. I think you were at 37 last year. If you look at other industries, whether it's RVs or power sports, they all seem to be moving toward a more efficient inventory model and holding less weeks on hand. Are you seeing any pushback from your dealer partners that that's the case?

I think we collaborate, Joe, with our dealer partners in setting inventory levels. I think what is essentially happening is because the market is so low at the moment, there are other considerations in terms of inventory quantities that might be present at a much higher market level. At a much higher market level, we might look just globally at weeks on hand, or at least certainly by segment weeks on hand. But now if you think about the level of inventory at around 13,000 units, it is low. On an absolute basis it's low, which means that other considerations like how many boats we have per dealer become much more important. There's a certain threshold. We have probably more than 1,000 dealer locations in the U.S. If they all have 10 boats, then it's 10,000 boats. We want them to have a good representation of our product lines. Many of them carry multiple product lines. So, as inventory levels become lower, I would say they are not going to continue to fall as fast as they might otherwise. In terms of efficiency, I don't know. Maybe there are other factors at play in other industries, but for us, our dealers in a lot of cases are specifying option content and colors and stuff on inventory. So we need to align them with specific dealer orders. So I am not anticipating, as we saw in COVID, where dealers were selling production slots versus product on the ground that we are going to see a statistically significant change in long-term weeks on hand.

Okay. That's helpful. And just to follow up on that, can you speak to the decision that you made to pull back on promotions in Q4? I think you wanted to avoid that. You called excessive wholesale pull forward. Were you seeing an indication that dealers were actually looking to take orders up in Q4?

No, I don't think we particularly were. But essentially, a couple of things to think about. I would rather be selling dealers boats when there is pull for them versus pushing them at dealers. And I think as soon as dealers feel they don't have enough inventory there will be plenty of pull. And then the other thing is we don't want to get into the situation of learned behaviors where dealers are just waiting for the next promotion, whatever it is, to do orders. We have to break that habit, and now is a good time to do it, I think.

Okay. Got it. Thank you.

At this time, I would like to turn the call back over to Dave for some concluding remarks.

Thank you all very much for your questions. They're really appreciated. I think given the market conditions, I think we've used our controllable levers to come close to maximizing the potential of our business in Q3 and 2024. And also position is very well in terms of inventory levels and a very fresh product line for 2025. Obviously, Hurricane Helene and Milton were an additional unwanted headwind in the quarter, but the direct impacts to our business were relatively minor. We do hope that the individuals and families and businesses that were more severely impacted by those hurricanes recover quickly. As you will have seen in the quarter, we executed a sequence of senior leadership changes with the intention of broadening the experience of our most senior leaders and also accelerating some aspects of the Navico Group strategy. So pleased to get that done, and the new leaders are settling in extremely well with a lot of enthusiasm, so I'm very excited about that. We're also very much looking forward to attending the Fort Lauderdale show next week, where, as I said, we'll debut a big range of exciting new products from a number of our brands, and we keep investing in those products to set up for 2025. Thank you very much.