BC - NYSE

Good morning. Welcome to Brunswick Corporation's Second Quarter 2025 Earnings Conference Call. [Operator Instructions] Today's meeting will be recorded. If you have any objections, you may disconnect at this time. I would like to introduce Stephen Weiland, Senior Vice President and Deputy CFO of Brunswick Corporation.

Good morning, and thank you for joining us. With me on the call this morning is David Foulkes, Brunswick's Chairman and CEO; and Ryan Gwillim, Brunswick's 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 Steve, and good morning everyone. Brunswick delivered strong second quarter results as the power of our market-leading products and brands, efficient operational execution and cost control, continued prudent pipeline inventory management, and the benefits from the resilient, recurring, aftermarket-focused portions of our portfolio resulted in second quarter financial performance ahead of expectations. This was despite the challenging macro environment and uncooperative weather in many parts of the U.S. through the first two months of the quarter. Year-to-date, boat unit retail sales in the value category are underperforming our initial expectations for the year, but continued overall resilience in the premium and core categories, combined with improving retail sales trends in July, is expected to provide a floor for wholesale performance in the second half of the year. Tariffs continue to directly impact our earnings and add uncertainty for both our end-consumers and channel partners, but all our businesses are executing strongly on their mitigation plans, resulting in a smaller net tariff impact than originally anticipated. Against this backdrop, we are pleased to report second quarter sales of $1.4 billion, up slightly from prior year, and earnings per share of $1.16, both exceeding the top end of our guidance and sequentially up from the first quarter. Earnings were impacted by the reinstatement of variable compensation and the effects of tariffs, but were consistent year-over-year excluding those items. A continuing highlight of our financial performance is our free cash flow. We had another quarter of outstanding free cash flow generation, with $288 million of free cash generated in the quarter, a record for any second quarter in company history. This performance also resulted in a record first half free cash flow of $244 million, a $279 million improvement versus first half 2024. The free cash generated in the past three quarters represents the largest free cash flow generation in any fourth through second quarter period in Brunswick history. In summary, despite everything going on around us, Brunswick was firing on all cylinders in the second quarter, but of course, Next Never Rests. And we are fully committed to doing a lot more, including progressing certain rationalization and manufacturing capacity optimization actions in the second half of the year to improve profitability and cash flow in several of our businesses, while still driving incremental product cost and operating expense reductions, and maximizing the positive impact of our cash generation on our capital strategy. Our overall results were supported by performance ahead of, or in line with expectations for each of our segments. Our Propulsion business delivered strong year-over-year sales growth, with shipments to U.S. OEM customers outpacing expectations, resulting in sequentially improved earnings despite the anticipated tariff and absorption headwinds. Mercury's outboard engine lineup continues to take market share, gaining over 300 basis points of U.S. retail share in outboard engines over 300 horsepower in the quarter, and 30 basis points of share overall on a rolling 12-month basis, despite heavy wholesale shipments by competitors ahead of tariffs being implemented on Japanese imports. Mercury's leadership in high horsepower outboard engines will be further reinforced by the new 425 and 350 horsepower engines launched earlier this week with performance, smoothness, quietness, weight, and other attributes far ahead of the competition. Our Engine Parts and Accessories business had another strong quarter, with slight year-over-year sales growth and steady earnings despite a weather-affected start to the boating season. This primarily aftermarket-based business continues to derive its success from stable boating participation and the world's largest marine distribution network, which in the U.S. has gained 180 basis points of market share, resulting from our ability to support same day or next-day deliveries to most locations in the world. Navico Group had slightly lower sales versus the second quarter of 2024, with aftermarket sales and sales to marine OEMs modestly lower. However, sales trends continued to improve each month in the quarter. Navico Group earnings remained consistent with first quarter levels and were driven by enthusiastic customer acceptance of new products and steady operational performance. Year-to-date revenue for Navico Group is only down 2.5% versus the first half of 2024, led by steady performance from the group's aftermarket businesses. Restructuring actions continue to gain traction despite tariff and market headwinds. And in the quarter, we consolidated two production locations and transferred European distribution to a 3PL. While in July, we implemented a leaner organizational restructure that will reduce expenses and increase agility. Our Boat business had lower overall sales, mainly resulting from weakness in value categories, but outperformed the market in some other key categories, resulting in overall market share gains, and has delivered 30 new model launches year-to-date. In response to the tighter value fiberglass market, we have rationalized our value fiberglass model line up by 25% for the 2026 model year. Dealer inventories remain healthy, and Freedom Boat Club continues its journey of profitable growth, launching its first club in the Middle East located in Dubai, and with plans for additional expansion, further reinforcing its position as the world's largest and only global boat club. Now looking at external factors, we see some areas of continued uncertainty but also some emerging bright spots compared with the first quarter. Interest rates remain steady with the potential for improvement, and foreign exchange tailwinds should benefit our predominantly U.S.-based business. In addition, the One Big Beautiful Bill Act favorably addressed tax increases that were previously scheduled to take effect and restored key pro business provisions such as full expensing of U.S. R&D. We are still analyzing the impact of all these changes on a global basis, but anticipate a significant positive cash flow impact moving forward. Brunswick continues to actively monitor and manage tariff exposure. Our coordinated team across trade compliance, supply chain and finance analyzes the latest updates, implements mitigations, and continually refines our forecast. Despite recent tariff increases for some countries, overall we've revised down our estimate for total potential net exposure. Ryan will go into more detail, but I will again stress that despite the negative direct impact of tariffs on our earnings, given our primarily U.S.-based, vertically integrated engine and boat manufacturing base and predominantly domestic supply chain, and the fact that we manufacture almost all our boats for international markets within those markets, we remain competitively well positioned in an environment of persistent tariffs. In addition, our leading position and scale affords us the resources and sophistication to effectively manage this complex evolving situation, including through the deployment of AI tools. We see an improvement in longer-term dealer sentiment and inventory comfort, which is moving closer to historical norms. Boating participation remains strong with upticks throughout the quarter. Dealer foot traffic is stable, and we have seen a slight increase in people considering a boat purchase in the next 12 months. OEM production rates were up over the second half of last year. And while overall retail was down for the quarter, July is off to a strong start. We're using competitive incentives where appropriate to support second half sales and are continuing to invest in and derive benefits from the latest digital marketing technologies to generate more leads and optimize conversion. Overall, while we remain mindful of the dynamic macroeconomic backdrop and soft consumer sentiment, there are some reasons for cautious optimism as we progress through early Q3. Moving now to industry retail performance. Outboard engine industry retail units declined 6% in the quarter, with Mercury gaining 30 basis points of share on a rolling 12-month basis, and 140 basis points of share in the same timeframe on engines of 150 horsepower and greater. Mercury continues to gain share internationally, with 170 basis points of share gain in Canada over the past 12 months, and strength in high horsepower share continuing around the globe. As of the latest SSI reporting for May, U.S. main powerboat industry retail was down modestly year-to-date, with Brunswick's boat brands outperforming the industry. Since the beginning of June, internal Brunswick U.S. retail has improved, with registrations only down mid-single-digit percent over the same period in 2024. On a global basis, first half retail remained very steady for our premium brands including Boston Whaler, Sea Ray, Lund, and NAVAN, and, as a whole, for our core brands. Retail performance for our value brands continues to be challenged. And as noted, we are working to optimize the profitability of these brands at reduced production volumes. We have continued to diligently manage boat pipeline levels, and second quarter U.S. wholesale shipments were down 9%, resulting in an 11% reduction in U.S. pipelines, or over 1,200 fewer units versus last year. Global pipelines are down 2,300 units over the same period, reflecting our continued focus on maintaining the freshest inventory in the market. Lastly, as I indicated earlier, according to internal data, July retail for essentially all of our businesses has accelerated and is trending positive versus July 2024, giving us and our channel partners positive momentum to start the back half of the year. Before turning the call over to Ryan, I want to highlight the diligent efforts across our enterprise that resulted in record free cash flow, despite some inventory banking for tariff mitigation, and continue to support our investment grade credit profile. Our strong Q1 cash performance continued into the second quarter. And in the first half of the year, we delivered $244 million of free cash flow, up $279 million versus the prior year. We've delivered $1.5 billion of free cash flow since 2021, and a record $522 million in the last three quarters, in very dynamic and challenging market conditions. Our balance sheet remains very healthy, with no debt maturities until 2029 and an attractive cost of debt and maturity profile. Given our continued strong cash performance, we are increasing our previous debt reduction guidance for 2025 by $50 million, to a total target of $175 million for the year. With this increase in our 2025 debt reduction target, by year-end we are on track to have retired $350 million of debt since 2023, and we remain on the path of returning to our long-term net leverage target of below 2x EBITDA. We are accomplishing this while maintaining significant financial flexibility, as evidenced by and commitment to our investment grade credit rating. At quarter end, we'll have $1.3 billion in the liquidity, including full access to our undrawn revolving credit facility. I want to thank the entire Brunswick team for their disciplined focus on execution, driving efficiencies, working capital management, optimization of capital expenditures, and many other actions that, together, allow us to return capital to shareholders, while maintaining financial flexibility and opportunistically reducing leverage. Our cash generation profile and investment grade credit rating are important to our business and also differentiate Brunswick in our industry and sector. 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. Brunswick's second quarter results were solidly ahead of expectations. Sales were up slightly over second quarter 2024 as steady wholesale ordering by dealers and OEMs, together with modest pricing benefits, offset the impact of continued challenging consumer demand market conditions. Operating earnings and EPS were ahead of guided expectations, but down versus prior year as the impacts of tariffs, reinstated variable compensation and lower absorption from the decreased production levels were only partially offset by new product momentum, the benefits from the slight sales increase, and ongoing cost control measures throughout the enterprise. Lastly, as Dave mentioned earlier, it was a historic second quarter from a cash generation standpoint, with Brunswick generating a record $288 million of free cash flow. On a year-to-date basis, sales are down 5%, primarily due to anticipated lower production levels in our Propulsion and Boat businesses, only being partially offset by steady sales in our aftermarket-led Engine P&A and Navico businesses. Year-to-date adjusted operating earnings and EPS are also ahead of expectations, but below prior year as expected due to the same factors from the second quarter. Year-to-date free cash flow of $244 million is a first half record and is the result of focused inventory and other working capital initiatives started in the second quarter of 2024. Now we'll look at each reporting segment, starting with our Propulsion business, which reported a 7% increase in sales resulting primarily from strong orders from U.S. OEMs. Operating earnings were below prior year primarily due to the impact of tariffs, lower absorption from decreased production levels and the reinstatement of variable compensation, partially offset by cost control measures and the benefits from the increased sales. Propulsion segment sales and operating earnings both grew sequentially versus first quarter of 2025. Our aftermarket-led Engine Parts and Accessories business had another solid quarter, reporting a 1% increase in sales versus the same period last year due to slightly stronger distribution sales. Sales from the products business were down 4%, while the distribution business sales were up 4% compared to prior year. Segment operating earnings were slightly down versus second quarter 2024, due solely to the enterprise factors discussed earlier. Note that first half Engine P&A earnings and sales are essentially flat to 2024, despite the challenging marine retail market conditions and overall unseasonable weather for a significant portion of the early year. This performance reinforces our well-stated view that our continued focus and investment in this aftermarket, recurring revenue and earnings business is critical to driving stable financial and shareholder returns. Navico Group reported a sales decrease of 4% versus Q2 2024, with sales to both aftermarket channels and marine OEMs down modestly, partially offset by benefits from new product momentum. Segment operating earnings decreased due to the lower sales, tariffs, and the variable compensation reset. Finally, our Boat segment reported a sales decrease of 7% resulting from anticipated cautious wholesale ordering patterns by dealers, which was only partially offset by the favorable impact of modest model-year price increases. Freedom Boat Club had another strong quarter, contributing approximately 12% of the segment sales including the benefits from recent acquisitions. Segment operating earnings were within expectations as the impact of net sales declines and the variable compensation reset was partially offset by pricing and continued cost control. This slide shows an updated view of our 2025 tariff impact should the current tariff rates continue for the remainder of the year. This slide shows the approximate percentage of COGS affected by tariffs currently in force, along with our anticipated 2025 net tariff impact for each category after planned mitigation measures are considered. The largest tariff impact remains China, and while less than 5% of our COGS, could represent $20 million to $30 million of tariff expense at current rates for product and component importation into the U.S. These incremental tariffs are in addition to the approximately $30 million of Section 301 tariffs that were included in our initial guidance for the year. Mexico and Canada supply accounts for approximately 15% of U.S. COGS, but most of the supply from these two countries are imported under the USMCA, meaning that our tariff exposure here remains small, assuming the continued USMCA exemption. Finally, there are other smaller tariffs on rest of the world imports. Not included in this analysis are other impacts or potential impacts, both positive and negative to the enterprise, including: potential retaliatory tariffs from the EU and Canada on U.S. manufactured boats and possibly engines and parts; tariffs on boats imported into the United States by our European OEM partners that use Mercury engines and parts; Mercury engine competitors which are paying tariffs on the importation of engines from Japan or other non-U.S. manufacturing locations; and maybe most importantly the continued disruption of the capital markets and the corresponding impact on our consumer. As everyone is aware, this is an extremely dynamic situation, and the entire Brunswick team is committed to minimizing the overall impact that tariffs ultimately have on our enterprise. My last slide shows our updated full-year guidance, taking into account the anticipated net tariff impact and continued market and consumer uncertainties, but also our strong operational performance and the recent market momentum. Despite a slightly softer marine market than initially anticipated to start the year, we remain confident in our ability to deliver our full year plan, with the result being us holding the midpoint of our guidance with anticipated sales of approximately $5.2 billion and adjusted EPS of approximately $3.25. However, given our exceptional first half cash generation, we're raising our free cash flow guidance by $50 million to greater than $400 million for the full year. This will allow for increased debt reduction efforts, which we discussed earlier, and should enable us to repurchase no less than $80 million of shares at a time when we believe that our share price remains severely dislocated from our performance in a challenging market. As Dave mentioned earlier, retail conditions in July have improved from the early part of the season, giving us more confidence in steady wholesale for the remainder of the year, with Q3 expected to deliver sequentially slightly lower revenue and earnings driven by the annual seasonality of our businesses. I will now pass the call back over to Dave for concluding remarks.

Thanks, Ryan. As we wrap up, I want to highlight some of our recent exciting new product launches, announcements and awards. Navico Group's Simrad brand recently launched AutoTrack technology for its HALO radar portfolio that enables automated tracking of multiple targets and provides unrivaled situational awareness to boaters. Our boat brands across the globe have been busy launching many new products, all featuring Mercury power and Navico Group technology. Our Harris Pontoons brand launched the 2026 Sunliner series, with a very stylish and contemporary new exterior and interior. The Sunliner is affordable but also aspirational with many thoughtful features, premium finishes and uncompromised quality. Our Rayglass brand in New

[Operator Instructions] Our first question is from James Hardiman with Citigroup.

So obviously, the tariff impact came down. I get to about a $0.60 benefit versus last time. The guidance is unchanged. And so is the right way to think about this that the ex tariff guidance came down by about that amount? And ultimately, from here, how should we think about -- is there more risk of upside versus downside just based on sort of the changes you've made there?

James, it's Ryan. Yes, I mean -- so if you remember back to April, we gave a tariff net impact potential of $100 million to $125 million. And then when we translated that to the EPS bridge, we only put $1 on the bridge. And it was for really two reasons. One, we anticipated we'd probably mitigate better than anticipated and indeed, we have. And second, if you remember when we reported earnings back in April, it was literally the height of all tariff rates. China was at 145%. Others were at extreme high levels. We didn't know if Canada and Mexico would be receiving USMCA exemptions. So really, the dollar of tariff impact that we put on the bridge hasn't really changed that much. I think maybe it's lower on the margins a little bit. But on balance, I think what we saw in April has kind of come through, that the tariff impact, we think is going to be certainly lower than we thought, but that dollar is still relevant -- is still pretty reasonable. The markets unfolded a little bit softer than we thought, although premium core is holding up. So no, I wouldn't think that the rest of the business "was down $0.50", and that's what we're guiding. It's just really the years coming in relatively similar to what we thought in April with $3.25 still being the midpoint of balancing the risks and opportunities.

Yes, James, it's Dave. I would add that given the dynamics of -- all around us, it is very difficult at the moment to take things to the bank. Really nice to see the trajectory in July, and we're very hopeful, but that is a 4- or 5-week trend. We just need to see a little bit more of that before I think we can flow it through.

Got it. Makes sense. And then as I think about sort of the phasing that you've laid out here, it looks like we should be expecting a significant decrease in Q3 earnings and then a significant increase in Q4. Remind us, if memory serves, I thought that Q3 was the big inventory reduction quarter a year ago, which would have created a really easy comp this year, assuming we weren't again undershipping Q3. So I guess, is it safe to say that we're now going to be again undershipping in Q3? And maybe -- I don't know, maybe there was a shift between -- shipments between Q2 and Q3 because obviously, Q2 was an outperformance quarter. So how do we think about all that?

Yes. It's pretty hard, James, to delineate between Q3 and Q4. I certainly wouldn't read much into it. Again, as Dave said, giving guidance in a dynamic environment like this is pretty challenging. I would say, as a reminder, production was down in the third quarter last year and then even more so in the fourth, both in Propulsion and in our Boat businesses. So there will be pickup there, goodness, if you would, in both. Wholesale shipments in both of those businesses, together with a very consistent P&A business, which obviously continues to perform extremely well in this environment. So no, I think we're looking at Q3, and I think we're off to a good start with July certainly. But I wouldn't read much into the difference between Q3 and Q4, although the production increase in Q4 versus Q4 of last year will be greater than the production increase in Q3. But again, there's a lot of timing impacts that go in there, and we're still thinking about a pretty strong second half of the year.

Our next question is from Xian Siew with BNP Paribas. We will move on to the next question, which is Craig Kennison with Baird.

I wanted to start with Navico. I guess big picture, when the market normalizes, whenever that is and then your innovation pipeline matures, where should Navico revenue and profitability settle? It feels like that's a big needle mover when you think about some of the out-year earnings potential.

Yes. Craig, thank you for the question. Yes, I think our expectations in long term for Navico Group are still in kind of low to mid- teens operating margin range. So we've got quite a bit to go. And we should, with a little bit of tailwind, have top line CAGRs in the mid to high singles. So we have -- there's a lot of potential in that business. I think we're doing a lot of great work both in refreshing the product lines, which are now regaining share even against the very strong and capable competition. So we're very excited about that. But also just getting the structure of the business reset or rightsize, if you like, and optimized for a market that is certainly smaller than we originally anticipated. And as you can see and as we gave some examples in the release in the slides, we are continuing to work our way through that. All of our businesses had some headwinds this year, as you know, from the reset of variable comp. We didn't really pay any meaningful variable comp last year, tariffs, a bit of absorption in the first half. But if you net those out, I think we're in a really -- getting ourselves in a really good shape in Navico Group. I'm very excited about the trajectory of the business and the reception of the new products. Pretty much everything that we have brought out has been a hit in the marketplace. So yes, very excited for that business, and it will be an engine of growth for us in the medium term.

Great. And Ryan, if I could ask you just on the tariff question. Slide 17 is super helpful as it relates to 2025, but it's been such a noisy environment that it's hard to get a feel for the true run rate. Have you done any work to look at '26, if like current policy persists, how we should think about the full year kind of run rate for tariff policy as it stands today?

Yes. Craig, obviously, we anticipated getting the question this morning. So we have played around with what '26 would look like. The answer is still pretty uncertain given all the variables. So not only are we paying the tariffs, right? You pay the cash tariffs, but it flows through the various financials in a different way, right? It goes on the balance sheet as an inventory cost and it flows out through the P&L over time. And then there's counteractions on duty drawback and substitution and benefit that we get to counteract those tariffs. So it's a big basket of things that we think about our supply chain team, trade compliance, finance. Everyone is kind of figuring out what the best course of action is and it changes, right, because the tariffs change every couple of weeks and then our response needs to change. I would say, as we sit here today, I don't see a huge change over next year. It's probably somewhere in the same magnitude. This year, we had a 10-month impact, right, but some of that was at higher rates. We also had some of the costs being hung up on the balance sheet by the end of the year. But next year, we'll have a little bit more duty drawback and some of the other financial benefits. So tough to tell. I don't think it will be greatly different from the 2026 impact, but I definitely need to get closer to the end of the year to really see what a run rate looks like. And certainly, we'll provide that guidance once we get to the January call. But certainly, I don't see a huge step change at this stage.

Yes. Maybe just to add, Craig, I think -- I mean, clearly, we are working to onshore as much as we can at the moment. So the rates are one component of what the tariffs will be. And certainly, there are balance sheet and other implications here. But broadly, our basis should be going down significantly as we move supply onshore into the U.S. And we're doing that at a pretty rapid clip, as you can tell from the way that our exposure even this year is reducing. I would say, though, and it was a little bit difficult to say this earlier that -- and we did state it, we are in competitively a pretty advantaged position. The U.S. market is by far the biggest marine market. We are very largely a domestic company here with a very large manufacturing footprint with a lot of vertical integration. And we believe that even though we'll be impacted by tariffs directly, our competitive position is strengthening.

Our next question is from Noah

I guess, first, just on the decision to rationalize kind of the value fiberglass model lineup for 2026 by 25%. How should we think about maybe structurally the Boat Group, whether from a margin perspective or volume potential perspective given that rationalization?

Yes, thank you. Yes, good question. So really, the amount of complexity that you can tolerate in a product line depends on the volume. And with volumes reducing, we can tolerate less complexity. So we take out those models that are obviously selling less, and that's the kind of rationalization process. We want to leave ourselves with a good progression in the product portfolio, but not excess complexity. And that's really what we've been doing. There are other actions that we are taking that we'll be able to talk about a bit later in the year to further ensure that we have stronger profitability in that part of the market, but that's really the way to think about it, reducing complexity in a market that is smaller. I would say though, I think everybody understands this, that the profit contribution of all of our Brunswick boats, the Boat Group margin is only one component of it. All of those value boats have Mercury engines on them. A lot of them contain Navico Group technology. And so this -- the margin stack, even in our value product lines, remains pretty good. And so we want to make sure that we are thoughtful as we approach this and that we consider the entire Brunswick margin impact.

Really helpful. Maybe just one more quick one. Any color on the tariff impact in the quarter? And then apologies if you already said this, but how should we think about maybe the distribution of that impact across segments at a high level?

Yes. I can take that, Noah. I mean, again, it's a bit different because the cash tariffs paid, obviously much greater than what's on -- what's flown through the P&L. Through the P&L is somewhere in the mid-teens for the quarter, millions. But again, there's all kinds of offsets and duty drawbacks that kind of net against that number. And then about 75%, 80% of the tariff impact is on Mercury -- is on the Mercury segment -- I'm sorry, on Propulsion, mostly a little bit on Engine P&A with Navico having kind of the rest of it and boats having a very small amount. One other item just -- and obviously, this is late breaking from earlier this week or late last week. We're obviously monitoring the 15% tariffs coming from Japanese imports. As Dave mentioned, we are the only U.S. engine manufacturer with our main competitors primarily manufacturing in Japan and almost none in the U.S. And so one thing we'll be monitoring, and this is not in the tariff number. And obviously, a benefit is the impact of that on Mercury sales and our ability to continue to take market share as obviously, we believe our products are already market-leading, but this is just another input for the costing profile.

Our next question is from Tristan Thomas-Martin with BMO Capital Markets.

Did you update your full year industry retail assumption for boats?

No, I don't think we didn't specifically do that. I think that the trend that we are seeing really that we called out is solid performance in premium and core, which is 75% or more of what we make and weaker performance in the value part of the segment, which is -- or the value part of the market, which is down about 20%. I don't see a really strong reason to deviate from that kind of profile. I don't think we've specifically updated any numbers yet.

Okay. And then what are your channel inventory weeks on hand? And how are you expecting to manage that? Or what's your target by year-end?

Channel inventory levels?

Yes. So on the boat side, we are in the low-30s today weeks on hand. By the end of the year, it's going to be around 40, give or take. But really, remember that, that is looking at backwards-looking retail, so rolling 12 backwards. If you look at just pure units, right now, we are basically in the lowest inventory position we've been outside of COVID since the GFC. And by the end of the year, both global and U.S. field pipelines will be kind of at historical lows. So we're going to take out a couple of thousand-or-so boats in the U.S. and about that globally as well, maybe plus or minus depending on how the back of the year shapes up.

Just remember, this is all value stuff we're talking about here. This is -- our pipelines and premium are lower than that.

Okay. And then the 1,000, was that a full year target? Or is that a second half target?

No, that would be a full year target.

Our next question is from Xian Siew with BNP Paribas.

On Propulsion, it was up 7%, including, I think, 11% outboard engines versus retail for outboard a bit down like 6%. And then I guess like what's kind of going on there? You mentioned kind of the OEMs pulling orders ahead of tariffs on the Japanese side. Are you kind of matching that? And should we kind of expect things to kind of moderate from here? Or is it just kind of the market share gains that are kind of offsetting, I guess, retail weakness?

It's actually a little bit of pipeline. So it's something we haven't really talked too much about. I know we have a little bit on the engine side. But over the last, call it, 6 quarters or so, we have taken out substantial pipeline inventory on the engine side, call it, 25-ish percent, maybe plus or minus even more on high horsepower. And that's at a time when, like you said, some of our competitors were pushing engines into the U.S., whether it's in advance of tariffs or other, but that's certainly the wholesale trend. But -- so what you're seeing is now kind of a matching of our continued retail share gains with our OEM customers that are actually producing a little bit more this time of year than they were last year. At this point, even in June of last year, May and June, a lot of our OEM partners were taking fewer engines because they had them in stock and they were going to produce fewer boats in the outlook months, and that ended up happening. So today, at a time where production is pretty stable and pipeline is lower, they're needing engines and we're fulfilling them. I can -- we've done like an entire review of all of our OEM customers there -- we are not losing share in any of them, any of them that are kind of dual sourced, if you would. And we plan to continue to gain retail share for the full year just as we've done the past several years. So it is really a pipeline. It's a pipeline game, and that's right now at a really healthy point where we'll probably be able to add engines here into the -- make sure that wholesale exceeds retail over the coming quarters.

Okay. Got it. That's super helpful. And then maybe -- so then on that point, where does the pipeline kind of end for engines and by the end of the year? And how do you think about kind of the margin progression from here in propulsion?

Yes. As we currently sit by the end of the year, pipeline will be down about 25% from the beginning of 2024. And it's kind of in the mid-30s down percentage-wise on engines greater than 175. And a lot of what it does from there is dependent on kind of the OEM patterns as we start all the way into '26 and the next retail cycle. But as we sit now, I don't think we're going to take much more out. I would say the second half this year, second half is not anticipating a whole lot of takeout. So what you -- what we've taken out is kind of -- is where we'd sit, but a little of that depends on where retail lands.

Our next question is from Stephen Grambling with Morgan Stanley.

You mentioned the initiatives to improve inventory and working capital. And I know you've talked about it a little bit on the call, but maybe you could just expand on what some of the initiatives are and how specifically investors should think about the impact of free cash flow conversion longer term, particularly if the retail cycle does start to turn here.

Yes. Maybe we can tag team. So yes, a lot of work going on, particularly with our supply chain, and it's been a very dynamic time. Obviously, we've been at a time when we have done some banking of inventory. But essentially, it has been very diligent management of incoming supply chain to make sure that we align the WIP and overall inventory levels with the production requirements. That is not an easy process. It does require us to work very closely with the supply base, and our team has done a wonderful job of doing that and managing to make sure that we keep a very healthy supply base, but that we don't oversupply ourselves. I think there's more room to run there, and we continue to see benefits from that, and we have very clear targets both in the short term and long term for our inventory levels. But that -- those inventory levels have come down, I think, a couple of hundred million in the last -- over the first half of the year. Ryan, anything you want to add?

Yes. The significant reductions in production in the second half of last year and balancing the incoming inventory is really a helpful driver of that. And the businesses, as Dave said, have done a really nice job of ensuring the balance. And that will then move forward as we look at the second half financials and gives us a nice benefit because we will be producing and wholesaling more in boat and engines.

Our next question is from Joe Altobello with Raymond James.

Just go back to the engine commentary for a second. If we assume a 15% tariff on Japan, I would think the impact here is pretty straightforward, right? And that would obviously significantly improve your competitive positioning. So I guess, first, is that showing up yet in OEM orders? And second, is that baked into your outlook at all?

Joe, kind of, I guess, no and no really. Well, first of all, it's not baked explicitly into our outlook, although obviously, it's going to be helpful to us. It is not particularly showing up yet because of the amount of engines that were shipped in the second quarter, in particular. I don't think something like this was not a surprise. So I think that our competitors still have stock of pre-tariff engines. But obviously, over time, those will kind of bleed out. And we have not explicitly baked an uplift in Mercury share into our forecast at the moment. But obviously, it's going to give us good momentum.

Okay. Very helpful. And maybe secondly, you referred to certain rationalization and manufacturing capacity optimization efforts. Maybe could you elaborate on that? What businesses? It sounds like Navico and Boats is part of that, but maybe are there others as well?

Yes. I think it's certainly -- we need to continue the process of ensuring that we have good productivity and efficiency, and that our overall capacity is aligned with our expectations for the market. We've been continuing to work on that, and I gave a few examples in the commentary that we previously provided, but there is more work to do. And honestly, we'll be able to share a bit more explicitly probably in the third quarter call on that or maybe in some kind of intermediate basis. But there are various things that we're continuing to progress that will, I think, materially address fixed costs in those businesses.

Our final question is from Jaime Katz with Morningstar.

So I'm curious about the second half projection for boat sales, and it implies basically that we're returning to growth. And I'm wondering if part of that is just mix from higher-priced boats or if you guys have seen interest or rising commitments from dealers that may help us see if we are at the trough.

Yes. Jamie, I think it's kind of two things. One, goodness in July has given us some momentum here as we get into the back half of the year, and we believe will continue to spur dealer orders. But certainly, the year-over-year comps versus the second half of last year really are a bit of a driving factor. We took substantial production out in the second half of '24 in order to keep inventory fresh and at the right levels. This year, just to match retail and wholesale, the wholesale will be stronger, right, in the second half. And so yes, premium and core, we plan on being up more than value, as Dave and I have said on the call. But really, if you go back and look at production rates, it's just matching wholesale and retail and the comparison versus an extremely light back half of '24.

And then can we just focus on value? Obviously, there are some value products that are moving. Do you guys have any insight into like what consumers -- what is facilitating conversion of those sales? And then maybe what we should be looking for to determine when those sales may return outside of interest rates perhaps?

Yes, a couple of things. Obviously, there's just broader economic sensitivity in that buyer population, if you like. So any uncertainties about inflation, employment, other things tend to be more acute in that population. It is an area where we see more financing at the point of sale. So more sensitivity to interest rates, certainly. I think we're doing a pretty good job in that segment, but it does require more promotions. You need to provide a reason for somebody to make that purchase. We try and do that by having the freshest inventory, the newest products and other things in the marketplace. But in the current environment, it also takes a bit of an economic push as well. So I think, hopefully, we'll begin to see some interest rate reductions in the back half of this year that will provide a bit more momentum. We'd hope to see something earlier in the year, but those didn't materialize. But I would say that those interest rate reductions are probably going to disproportionately benefit the buyers of value or entry-level product.

We have no further questions at this time. I would like to turn the conference back over to Dave for some concluding remarks.

Well, thanks for your questions, everyone. Much appreciated. It was another solid quarter for Brunswick, lots of new products, very diligent operational work leading to our performance really across all of our businesses and segments. A couple of things probably stand out, our cash performance and also the fact that our revenue was slightly up over the second quarter of 2024. It was nice to see that inflection. So great to see. As we noted, we're continuing to work hard and in a smart way to mitigate the direct impact of tariffs. But as we discussed in some of the questions here, our footprint and vertical integration do provide us with a fundamental competitive advantage in the presence of persistent tariffs. We are still -- we are working really tirelessly on further actions to re-expand margins in the business, and we really have very tangible actions lined up to achieve that. And then finally, although we are beyond the midpoint of the selling season, we do get a real sense that the market wants to rebound with just a little more kind of normalization of the macro backdrop, maybe later in the season with some tailwind from interest rates. So as we enter the second half, we do enter it with some cautious optimism. Thank you very much.