Good morning, and welcome to Brunswick Corporation's Second Quarter 2019 earnings conference call. [Operator Instructions] Today's meeting will be recorded. If you have any objections, you may disconnect at this time. I would now like to introduce Ryan Gwillim, Vice President, Finance, and Treasurer..

Good morning. Thank you for joining us. On the call this morning are Dave Foulkes, Brunswick's CEO; and Bill Metzger, 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 the details on the 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'll 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 schedule -- sections of the consolidated financial statements accompanying today's results.

As a reminder, on June 27th 2019, Brunswick completed the sale of its fitness business. Starting with the second quarter of 2019, the historical and future results of this business are now reported as discontinued operations.

Therefore, for all periods presented in this release, all figures and outlook statements incorporate this change, and reflects continuing operations only, unless otherwise noted. I would now like to turn the call over to Dave..

Thank you, Ryan, and good morning, everyone. The second quarter represents a pivotal point in Brunswick's transition to a pure-play marine company, and we have tremendous confidence in the future of our business. Completing the fitness transaction allows us to center our strategy and message on our unparalleled marine platform.

In addition, the combination of deploying sales proceeds, reinforced by today's announcement of more aggressive share repurchases, and the decisive actions recently announced regarding the structural reduction of approximately $50 million in annual run rate costs across the enterprise, enables us to substantially enhance our long-term earnings power under a range of potential market scenarios.

The demand environment in the first half of 2019 was challenging in certain of our businesses, due in significant part to unfavorable weather across many regions of the U.S. and Canada. Muted market demand affected both of our segments, mostly through reduced demand for value boats and lower horsepower engines.

However, we were able to post strong earnings growth in the quarter due to power products contributions, the overall strength of our premium brands, cost management actions and stable P&A business performance.

We also completed the sale of the fitness business in the quarter, and plan to aggressively deploy proceeds in a manner that enhance the shareholder value, which I will discuss in a few minutes. I'll now provide some commentary on our segments and the overall marine market.

For the marine engine segment, revenue growth was 4.5% in the quarter with outstanding operating leverage of 56%, leading to a 160 basis point improvement in operating margin. Demand for higher horsepower outboard engines remains particularly strong, especially in the 175- to 300-horsepower V6 and V8 categories introduced in 2018.

Sales of higher horsepower engines to the dealer channel are up significantly over first half 2018, resulting in more robust repower activity.

Capacity investments to further our production capabilities in this horsepower family remain on target for completion in the fourth quarter, with the new state-of-the-art diecast facility opening in this quarter as part of these investments.

We also launched a 450-horsepower racing outboard in the quarter following closely from the mainline 400-horsepower engine launched in February.

These platforms are the most recent evidence of the success of our strategic investments in industry-leading technology and product development capability, which is driven both market share gains and margin accretion.

The parts and accessories business continued its steady performance led by power products with the substantial aftermarket portion of the business, which comprises 75% of total P&A sales, outperforming sales to OEMs.

The Boat business continues to focus on growing its premium boat brands which significantly contribute to the sales and earnings performance for the segment. Boston Whaler and Harris, in particular, are planning major product launches during the balance of this year and early next year as we maintain investment levels needed to drive future growth.

For the second quarter, the boat segment's revenue and earnings were modestly down but operating margins remained relatively stable as the business countered softer market conditions and elevated discount levels with focused cost containment.

Finally, as most of you already know, we completed the purchase of Freedom boat club in May, making us the leader in shared access boating. The business is performing to plan and we look forward to working with the Freedom team, capitalizing on the many synergies with our other businesses and continuing to grow this fantastic business.

Next, I would like to review the year-to-date sales performance of our segments by region on a constant currency basis, excluding acquisitions. In the U.S., total revenues were up 1%, while international sales in total were up 5%.

International sales for the engine segment were up 10% with gains in all regions, reflecting the performance of the outboard and parts, and accessories business lines. Boat segment international sales were down 6%.

As expected, demand in Europe was lower due to slower market conditions and the supply constraint caused by the transition from a contract manufacturing relationship that we noted in January. Canadian boat revenue was also lower in the first half, reflecting the impact of both import tariffs and unseasonable weather on dealer purchasing behavior.

As a reminder, the import tariffs, which were put in place in Q3 last year, were removed in Q2 this year, which should benefit comparisons in the second half of 2019. This table provides some color on the performance of the U.S. marine market. NMMA outboard engine unit registrations were up modestly year-to-date.

With outboards below 150-horsepower, down 7%; and outboards 150 and above, up double digits. First half SSI data for the U.S. boat market is down 7%. And on a trailing 12-month basis, it's down 2%. As I mentioned earlier, this is due mostly to weakness in the value end of the aluminum, fish and pontoon categories.

The market on a dollar basis continues to outperform unit comparisons due to strength in premium categories and continue transition to higher horsepower engines.

Overall, despite the slower market conditions, consumer health and general economic indicators remain fairly positive, giving us confidence that the retail market trends will likely stabilize as we get into the back half of 2019 and into 2020.

Finally, as long anticipated, we closed on the sale of the fitness business at the end of the second quarter with net proceeds of approximately $470 million from the sale. We have an aggressive plan in place to deploy the proceeds and have already taken certain steps to accelerate our planned actions.

Outboard has increased our share repurchase authorization to $600 million, and we plan to repurchase 330 million of shares during the second half of the year. The increased authorization also gives us flexibility to continue on an aggressive repurchase schedule beyond this year as market conditions allow.

Note that we have already repurchased 70 million of shares since the first-quarter earnings call, bringing the total plan repurchases for the year to 400 million or approximately 10% of our outstanding shares. When combined with the recently completed acquisition of Freedom boat club, these actions fully invest the fitness sale proceeds.

In July, we completed two actions to strengthen our balance sheet that were included as part of our normal capital strategy plans for the year. First, we called our $150 million of outstanding senior notes, which will be redeemed on August 2nd.

Additionally, we completed the annuity placement for our legacy pension plans, finalizing the exit from our remaining defined benefit plans. Now I'll turn the call over to Bill for additional comments on our financial performance..

Thanks, Dave. On an as-adjusted basis, diluted EPS for the quarter was $1.45, a 9% increase versus the second quarter of 2018. Sales were up 3%, but down 3% without the benefit of power products. Operating earnings improved by 15%, which translated into an operating margin improvement of 160 basis points, an impressive leverage of 65%.

On a year-to-date basis, net sales are up 6% versus 2018, and flat without the benefit of acquisitions. Operating earnings have increased by 16% with strong margin growth of 120 basis points. In the marine engine segment, revenue grew 4% led by power products and continued robust demand for higher horsepower outboard engines.

On an organic basis, sales were down 4% primarily resulting from decreased sales of outboard engines 150-horsepower and below and sterndrive engines. These declines are due to unanticipated OEM production cuts with weather impacting demand especially in the freshwater market in the Northern U.S.

and Canada, where Mercury has an overindexed share position. The performance of the power products or the parts and accessories business continues to be enhanced by the addition of power products.

Note that the aftermarket portions of the Mercury business, including associated P&A products, and distribution businesses remained relatively flat despite the challenging first half market. Sales to OEMs were softer but still outpaced industry performance.

Mercury's adjusted operating earnings increased 14% in the quarter due mostly to power products. In addition, favorable impacts from changes in the sales mix and cost control measures more than offset the impact of tariffs and unfavorable changes in foreign exchange rates.

This performance resulted in a 160 basis point increase in adjusted operating margins and operating leverage of 56%. In the boat segment, adjusted revenue decreased by 2%, which excludes the impact of the sport yacht and yacht business exited last year.

By category, aluminum freshwater sales were down as declines in value, fish and pontoon sales offset increased sales at Lund. Recreational fiberglass was flat for the quarter with improved mix toward larger product leading to gains at Sea Ray.

Saltwater fishing sales were slightly down as the overall industry category has leveled off after several years of strong growth. Overall, average selling prices increased, reflecting expanded content on boats, along with inflationary price increases.

Adjusted operating margins were relatively stable as benefits from cost control measures offset the impact of lower volume and higher retail discounts required to lower pipelines in the second half of the year.

Dealer pipelines ended the quarter with 35 weeks of boats on hand, measured on a trailing 12-month basis, which is up five weeks from last year. However, on a unit basis, field inventory is up only 6% versus the end of the first half of 2018.

It's important to note that a substantial portion of the increase is comprised of aluminum, fish and pontoons where market demand has most trailed expectations. As we discuss every quarter, we pay very close attention to pipelines, attempting to match our wholesale shipments to expected retail performance.

The weeks-on-hand metrics influenced by the past 12 months of activity and is reflecting the slower retail trends over that period. Wholesale unit sold in the second quarter were down 9% versus Q2 of 2018 with a 7% decrease year-to-date.

In spite of our attempts in recent quarters to respond to market demand, greater wholesale reductions are necessary in the second half to normalize pipelines.

As a result, we are planning to significantly lower wholesale shipments in the second half, which is necessary to realign pipelines with demand, resulting in overall levels at year-end that are meaningfully down in overall units versus 2018, and consistent on a weeks-on-hand basis, providing a solid base entering 2020.

Our second quarter continuing operations GAAP results also reflect the impact of certain items, which have been excluded from our as-adjusted results. We recorded restructuring, exit impairment and other charges in the quarter totaling $5.9 million, primarily related to cost actions taken across the enterprise.

In addition, we incurred $7.3 million of purchase accounting amortization in connection with the power products and Freedom boat club acquisitions, and $2.9 million of charges related to product warranty and discounts related to legacy, sport yacht and yacht products.

We are revising our guidance for the full year adjusted diluted EPS, which is now in the range of $4.20 to $4.30 per share. This incorporates lower sales volumes in the back half of the year, including pipeline rebalancing efforts, which are offsetting benefits from cost-reduction activities and share repurchases.

We anticipate revenue to be up slightly versus 2018 and operating earnings growth of low to mid-single-digit percent due to solid improvement in gross and operating margins. For the third quarter, we anticipate revenue and operating earnings to be down mid- to high single-digit percent, an EPS in the range of $0.95 to $1.02 per share.

Moving to tariffs. We anticipate a net impact to 2019 pre-tax earnings of $17 million to $22 million, which is an increase from the levels discussed on the first-quarter call, solely related to the wave three of China tariffs increasing from 10% to 25% in early May.

We continue to work with our supply base to minimize the impact of these tariffs with our ability to reduce supply costs or increase affected end-product pricing in line with our overall tariff impact assumptions. On the boat side, the retaliatory tariffs on boat exports to Canada were lifted in the quarter.

As Dave mentioned earlier, this should have a favorable impact on comparisons in the second half of the year. The impact of retaliatory tariffs on boat exports to the EU remains unchanged and incorporated into our plan. I will conclude with an update on certain items that will impact our P&L and cash flow for 2019.

We anticipate free cash flow in 2019 in excess of $260 million, down from the initial projections due primarily to lower anticipated earnings for the year and slightly higher working capital usage.

Our cash flow generation still allows ample capacity to continue funding future investments in growth, including acquisitions and successfully implementing our capital strategy. We estimate that the effective book tax rate for 2019 will approximate 22%, which is slightly lower than our initial assumption for the year.

And finally, as a result of planned share repurchase activity, we anticipate average diluted shares outstanding to be approximately $85.5 million, a 3% reduction versus our previous estimate of $88 million.

As Dave described earlier, we continue to execute against our revised capital strategy plan for the year, which was augmented by the fitness sale proceeds. This slide shows the updated assumptions taking into account the actions discussed.

Our capital expenditure plan remains focused on investments related to product development in our premium brands, and capacity for higher horsepower outboard engines. I'd also like to note that the final cash requirements associated with the pension exit were more favorable than anticipated.

I will now turn the call back to Dave to continue our outlook comments..

Thanks, Bill. As I mentioned in the opening of this call, we continue to execute against our plans for the year, and our overall marine strategy with several key factors driving our future performance.

For our marine engine business, we anticipate net sales growth in 2019 for the segment in the low- to mid-single-digit percent range with a solid improvement in operating margin.

Our priorities of this segment include growing market share in outboard engines, especially in the greater than 175-horsepower categories and completing additional capacity initiatives necessary to meet the strong market demand for these products.

The impact of additional capacity will also drive meaningful revenue and earnings growth heading into next year. Even with the substantial product launches earlier this year, our new product pipeline remains solid as we invest in additional P&A and propulsion products to further future growth.

The integration of the power products business remains on track with overall performance in line with expectations. Similarly, the boat group is executing against its operating and strategic priorities.

We anticipate modest top line and margin declines in 2019 with an enhanced focus on improved operating performance at several of the boat facilities, combined with increased attention on cost-reduction activities, helping offset the slow marine market conditions and lower sales from certain Boston Whaler product lines in advance of impending new product launches.

More importantly, these actions will help drive margin improvement in 2020 as the full year benefits flow through the cost structure of the business. New products will continue to take center stage, including major Boston Whaler product launches starting at the Fort Lauderdale boat show. That will refresh many mature product lines over the next year.

Harris also has upcoming new product launches with an exciting and updated premium pontoon platform being shown in upcoming dealer meetings. Finally, Freedom boat club continues to provide us with a platform to grow our leadership position in shared access boating.

And we expect Freedom to open its 200th location, most likely by the end of the third quarter, and have just under 2,500 boats throughout this global fleet. Before I close, I wanted to provide some thoughts on our anticipated performance for the remainder of 2019 and 2020.

While our performance this year has been affected by a softer-than-expected market, our core businesses are performing well, and we continue to outperform the market in several areas, including higher horsepower outboard engines, premium boat categories and P&A.

In addition and as discussed on this call, we have taken or executing against several significant actions to enhance the earnings profile of the company moving forward.

We have completed two major portfolio enhancements selling Life fitness and acquiring Freedom boat club, and are working through a successful integration of the power products business. We are deploying the fitness proceeds in an aggressive manner to increase shareholder returns.

Finally, we are actively managing enterprisewide costs, while still investing in new products and technology, which will enable future growth and exhibiting prudent pipeline management. In short, a very positive year despite challenging market conditions.

In looking to 2020, I would like to reaffirm our commitment to delivering on the 2020 EPS targets that we established in Miami earlier this year, assuming a market flat to 2019. Our results will benefit from full year impacts of several of the items I've discussed at length on this call.

Even in a flat market, additional growth is achievable from our formidable parts and accessories business, and the absence of 2019 pipeline reductions.

Overall, we continue to proactively position the business to operate and maintain healthy levels of profitability in various market conditions, which we believe is not yet fully reflected in our valuation. In closing, we continue to be confident in our ability to deliver against our long-term strategic plan.

Despite a softer-than-anticipated Marine market in 2019, we will leverage our strength in premium product categories in both our segments, our increased commitment to cost containment and our aggressive capital strategy plan to deliver what would be the 10th consecutive year of adjusted EPS growth.

We will prepare for a successful 2020 by continuing to invest in new products, some of which you will see very shortly, ensuring healthy pipeline inventory levels and exiting this year with a healthy balance sheet. After a pause in August, the team will be hitting the road again in September, and we look forward to seeing many of you.

I will now open the line for questions..

[Operator Instructions] Our first question comes from Michael Swartz from SunTrust..

Hey, guys. Good morning. Just wanted -- just -- I think a broader question on some of the engine investments you're making and new capacity. It sounds like, based on your commentary, that that will give you a tailwind going into 2020.

I guess, I'm just trying to understand and maybe you can help flesh it out for everyone, just given the softer market backdrop, how maybe those two items fit?.

Yeah. Michael, so the majority of the softness that we've been seeing is in value boats and outboard engines below 150-horsepower, which tend to be associated with those -- more associated anyway with those aluminum boat categories.

For our new engine platform, 175 to 300 on our existing platforms in the high horsepower range, we are continuing to see more demand than we can satisfy and accelerated market share gains. Obviously, we want to fully take advantage of that.

If you remember on our earlier calls, we referred to a couple of kind of multiplying factors that allows us to take advantage of. One is that while we are behind supplying a full demand, some of our more profitable customers are still with our product.

And then the other thing is it leaves us -- we're in a great position once we get that capacity to even more aggressively go after market share gains. We have been a little bit limited.

We've been gaining market share but still a little bit held back by the fact that we need more product to be able to supply conquest OEMs and other potential customers. So yes, that capacity is really important to us, and we do expect a significant tailwind from that into 2020..

And Michael, if I could just maybe add to that. If you look at the international performance of Mercury in the year-to-date period, as we've gotten more product position internationally, we've really seen a real nice pull-through and sales gains.

So I think that kind of demonstrates that as we get more capacity to satisfy demand, there's not only opportunities to sell stuff with a higher horsepower engine, but really across the full product family..

Yeah. Absolutely..

OK. That's great. Thank you. And then just a second question, I mean, given the state of the industry and your efforts to bring down pipeline levels, I guess, to year ago levels on a weeks-on-hand basis.

I mean, is this something that you think is kind of cleared up by calendar year end where we can kind of hit the ground running in 2020, and maybe have little to no hangover from the inventory clearance?.

Yeah. Absolutely. That is exactly what we're planning to do. We want to go into 2020 completely clean. We will have -- when we go into 2020 based on our current plan, we will be down a significant number of units versus where we were at the end of 2018, and about equal weeks on hand.

So we expect to be in extremely strong position going into 2020 from a product perspective..

And what -- I guess, what's your expectation for retail on the back half of the year to really get there? I mean, obviously, that would assume some sort of stabilization, I would assume?.

It's more stable. It's slightly improved from the trends in the first half of the year. And I would say that it is going to be heavily influenced by the performance of retail over the next 90 days.

So as we look at what happens in July, August and September, that will be kind of the period of time where a lot of the retail activity needs to happen, and we will be curtailing production along the way as well. So we should start to make some pretty meaningful headway on this by the end of Q3, and then have a little bit to take care of in Q4..

Yeah. I think, although, you know, there's a bit of stabilization, we're not expecting the market to change significantly in the second half of the year. So we're planning for that..

No..

Great. Thank you..

Out next question comes from Tim Conder with Wells Fargo..

Thank you.

Gentlemen, I just wanted to -- and along the pipeline reduction commentary there, the type of the dealer systems that you've already done or programs that you put in place to clear that out here over the balance of the year, any color that you can give there? And it sounds like ahead of the new product introductions with Whaler and in conjunction with what you've commented on the saltwater slowing, you're just going to kind of maybe dial that back a little bit collectively? Is that may be another area to not quite as bad as the aluminum, fish and then pontoons, was that another area where you're doing a little bit of pipeline adjustments?.

I would say, on Whaler, I think you know in our recent product launches that we launched products in whitespace areas, the Realm families, the 350 and 380, which have been very successful. But we are now focused and deep into the process of rejuvenating some of the more mature product lines.

And I cannot tell you how excited I am about that, and you'll begin to see that very soon. The boats look fantastic. But of course, we want to make sure that as we launch those products, we launch them into as clean as possible wholesale pipeline as we can. And so we deliberately making sure that that is the case.

So that's really the story around -- well, Whaler is doing extremely well, and we want to make sure that those new products get into the field as quickly as we can..

Okay.

And then on the programs with the pipeline reduction in the programs there, I think you alluded to that in the press release a little bit?.

Yeah. So we've been working with our dealer partners, you know, MarineMax, to make sure that we are competitive in the marketplace. And that has certainly led to some higher discounts than we've had to start in recent years.

I would say though that you are seeing some of the effects of that on financial basis already in Q2 because of financial rules mean that if we anticipate retail discounts needed to progress the pipeline, we book them as soon as we anticipate them.

And so that is not going to be -- the full weight of that isn't going to be in the back half of the year. We've already taken some of that in the first half of the year..

Yeah. I think, Tim, and if you think about the implications of that in the second-quarter margins for boats embedded in that relatively stable margins, we did take a fair amount of discounts through the P&L, which we were able to mitigate through some cost-reduction efforts, as well as, probably maybe a little bit more favorable mix.

But in general, I wouldn't take and read through that because we had stable margins, it didn't mean we didn't take care of it in the quarter. We actually did have some meaningful discounts that we recorded in the quarter..

Okay. That all very helpful, gentlemen. Lastly, shifting to Freedom boat group. You've commented that the franchise fleet generally has about a two to three-year sort of replenishment cycle, maybe a little bit to the higher end of that range.

Is there any reason to believe that something other than a straight line type of replenishment will go on here, I mean, either shortened or elongated, as you see things now and as you're getting that integrated?.

Well, I think a couple of really encouraging trends for Freedom. We expect to be in 200 locations by the end of the third quarter. And then the number of boats in the fleet is now close to 2,500 boats. So that is a really meaningful quantity. No particular change in our anticipation around the kind of replenishment cycle, we think two to three years.

It's -- I think -- we can offer our -- firstly, I guess that if you think about this that -- we have around 20-or-so company-operated locations. Obviously, we'll be refreshing those with Brunswick product as quickly as we possibly can.

The balance of the franchise locations, we believe that Brunswick can offer our franchisees extremely attractive boats, engines and services, including financing, extended warranties and many other things that will cause our franchisees, just by themselves, to want to accelerate transition to Mercury products and to Brunswick boats.

I would tell you that the first boats with Mercury's on the back have already arrived in the franchises, so that's extremely exciting. And that was actually some of the existing boat OEMs transitioning their transom from competitors to Mercury to Mercury. So that is a nice very quick impact.

So I don't know if I can give you, Tim, a straight line versus different relationship to that. I would tell you that I believe that we're doing all the right things to make that transition occur, and we're very excited about how quickly this business is growing..

And then that should be supportive of, obviously, the overall product business, and then add on then to the margin which you're really getting on the core Freedom side. .

That is exactly right. I mean, the margin stack up in that business is really, really attractive, and we're very anxious to take full advantage of it..

Thank you. Our next question comes from Dave MacGregor with Longbow Research..

Yes, good morning. Just looking at the international business, awfully big difference in the experience with growth in engines versus boat engines up nine, boats down 17. I'm guessing some of that is success with the new engine product platform.

But can you just talk about the disparity there between the engine experience and the boat experience?.

Yeah. I think the most discrete difference is really that the issue that we mentioned earlier in the year, we had a disruption to supply in our contract manufacturing arrangements for boats, which we're working our way through right now, but which had a disproportionate effect on the difference between our boat and engine sales.

We have extremely competitive boats that are designed from the European market. We also have boats that are produced locally in Europe like Sea Rays and Bayliners. They're also very competitive. So we are working hard right now to address that issue with European boat manufacturing.

One difference between the way that boats and engines are sold in Europe versus the U.S. is that boats tend to be shipped with no engines on them, and then the engine gets married up at the dealership. What that means is if our engine -- if our boat supply is disrupted, there is no disruption to engine supply.

So that's just a difference between the way that it worked. I would tell you that all of this is an extremely small impact on our earnings, but something that we are working to address..

Thanks for that. And just a follow-up. Can you just talk about the MerCruiser. I guess, given the weakness in sterndrive, it continues to be a drag.

Can you quantify the extent to which it was a drag?.

I think if you -- a couple of very positive things about our sterndrive business. We took the decision, as you know several years ago, to rationalize our sterndrive product lineup and essentially take control of the design and manufacture of those engines.

And so we are not incurring any costs right now to upgrade those engines or change the engines or drives that are due to reasons outside our control. So we were able to modulate that business extremely effectively and minimize any costs. I would say that the primary beneficiary of that transition from sterndrive is us.

We have put in place an incredible outboard lineup, and it's been very effective, both in conquesting OEMs and general market share, but it's also a very effective lineup in the same horsepower categories as sterndrive. So we do see this rebalancing.

And there are some categories of sterndrive boats that are holding up pretty well, particularly larger day boats in the lakes, but that, you know, that transition continues to occur, and we are in a great position to be able to kind of modulate that..

Thank you. Our next question comes from Craig Kennison with Robert W. Baird..

Good morning. Thanks for taking my questions. I wanted to start with the consumer and really get your read of the U.S. consumer. Clearly, weather was a factor this quarter, no doubt about it.

But is there something else going on with that consumer that gives you pause?.

Not -- I mean, if I think if you -- we look at -- we go to dealers, we look at dealer surveys and sentiment. I think weather remains the predominant factor that our dealer partners call out as being something that's affected boat sales in this year.

So you know, I think if there are other trends, it's not something that comes through strongly in our interactions with the consumer..

And in your experience, when it's a weather issue, does that demand return later in the season? Or at this point, you think it's just differed into next year?.

I think we'll get some of it back, I don't think we'll get all of it back. So that is in our plans now for the balance of the year. We expect to see some modest declines. So yes, I think we'll get some of it back, but probably not all of it..

Okay, and then, Bill, for you. On the margin front, you know, the portfolio has changed a lot given all that you've done to get focused on marine.

Could you give us an update on what you think of as your incremental or decremental margin in each of your marine segments?.

You know, Craig, I'd say, we continue to target at least -- if you look at the core performance decline in sales, we actually saw decrementals that underindexed against kind of what we will consider our target as 20%, right? So if you think about the benefits of the portfolio changes that we've made, we've seen margins hold up considerably better than I think people would have expected to in a softening market environment, partially due to the portfolio, partially due to the fact that I think we've been extremely proactive on the cost side of the equation.

On the upside, I still think 20% is our general target. I would say, boats tend to be a little bit lower than that, and engines tend to be a little bit higher.

And I don't think there's a big difference between the outboard engine business, and the P&A business on the upside, but boats, given the portfolio structure, would tend to be a little bit lower than that..

Perfect. Thank you..

Our next question comes from Steve Zaccone with JPMorgan..

Great. Thanks for taking my question. I wanted to dig a little bit more on the segment top-line performance. So looking at propulsion sales, can you just elaborate a little bit more on your growth expectations for the second half of the year? My math implies propulsion will be down about mid-single digits on a full year basis.

So what's the breakdown performance above 150-horsepower versus below? I know you're expecting the overall propulsion category to return to growth in 2020..

I'd say, you're kind of thoughts on the propulsion side of this are directionally correct on a mid-single. I think we're going to see probably more concentrated impacts in Q3 than we are in Q4, only because we would expect some of the production cuts on the part of OEMs and even our own to be more -- to more weighted toward Q3 than they will be Q4.

I'd say, on the split between 150 and above and 150 and below, I think most of the decrease -- in fact, all of the decrease is going to be in the categories 150 and below. And as we get into the fourth quarter, we should start to see the 175 to 300 category pickup as the new capacity is brought online.

So that's one of the reasons why Q4 starts to look better for propulsion than Q3 does, and it's more favorable..

I think the second part of your question, we have -- we still have significant backlogs on 175 through 300. So just being able to address the backlogs is going to be a great start to us. But yes, we think that getting that capacity in place is a significant tailwind to us into 2020 for the reasons that I described earlier.

We're undersupplying right now even to our existing customer base, and we have been gaining market share, which we expect to fully exploit when we get that additional capacity..

Great.

And then just a higher-level question on the broader industry like where we sit today, are you concerned that there could be some areas of weakness that may persist into 2020? I mean, are there any particular areas where you're, well, watching in terms of bloated inventory levels in the channel?.

So I think we are very prudently addressing the inventory levels and making sure that by the end of this year, we are appropriately placed for 2020 even if the market is flat. We'll be down significantly in units in the field by the -- by 2020.

I think that what you've seen us do, I think, is positioned our business to be extremely robust in a wide variety of market conditions. I think our best planning for 2020 is to make sure that even in the case where we have a flat market demand, we meet our 2020 financial performance expectations.

So I don't know if I have a great way of predicting particular segment trends, but I would say that there's nothing new that is happening that we haven't already seen in 2019..

Thank you. Our next question comes from Scott Stember with CL King..

Good afternoon, guys. You know, you guys stopped last quarter, giving, I guess, your individual retail sales numbers.

But can you just give us a flavor how you guys are performing versus the market? And maybe talk about a couple of categories in your Q2 guidance?.

Well, I think we'll say that our premium boat brands are performing extremely well, very, very strongly, solidly. I would say that on a unit basis, we, obviously, are in the aluminum value boat space, and that has been affected more than others, but I think that we are still performing okay.

I think in -- on the pontoon side, new products that we're already beginning to launch will improve our market share in that area. But I think the thing to focus on here is in terms of impact to our financial performance, we're heavily overindexed on the premium categories where we're performing extremely well..

Got it. And you know, reports that, obviously, the weather has cleared off, the latter part of July.

What are you seeing -- just are you seeing some sort of stabilization at retail, you know, so far in the last -- I don't know, last few weeks?.

Yeah. I think July looks somewhat better. And it's nice to see -- certainly, I'm sitting in Chicago here, it's awfully nice to look outside at some consistent good weather. We see more people boating, and that's very constructive for us. So July looks constructive, I would say..

And just lastly, going over to 2020, you guys maintained your guidance even on the low end. I guess, it looks pretty healthy growth and a part of it is the stabilization of the business and not having to deal with the inventory issues that you're dealing with right now.

But how prominent the share repurchases play into your guidance? I know you talked about it a little bit, but for 2020?.

Well, I think, Scott, if you do the math, it's obvious fairly significant. It's kind of a total benefit, $0.50 to $0.60 a share, capital strategy wise. So that's a fairly significant benefit.

I think when you cut through it all against the $5 to $5.50 target that we had at the beginning of the year, we've had market down this year when we expected to be up three to five. We're also planning next year to be flat. So that kind of gets us in a position where we're behind on those two factors.

Between capital strategy/share repurchases, deploying the fitness proceeds. And then two, the cost-reduction efforts, those factors pretty much balance themselves out against where we expect it to be for 2020..

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

Our next question comes from Joe Altobello with Raymond James..

Hey. Thanks, guys. Good morning. The first question, you know back to 2020, I think this year, you guys still looking for about $10 million to $15 million of incremental tariffs.

What does that look like for next year, assuming you keep the exclusions on the 45- to 65-horsepower engines?.

So it's effectively, Joe, that we're assuming the same for next year..

So no incremental effects..

Yeah. No incremental effects..

And if you move that exclusion, what happens?.

It would be probably -- Joe, this is Ryan. It would be probably in the $20-ish million number of expense. But again, if you've been following the news, there's actually been a push in the Senate to put a bill through that would actually extend the extensions -- extend the exclusions -- exemptions.

So that's something we're not -- we would consider that a small risk at this point..

Good to know. And then just secondly, in terms of the cost savings that you guys have announced over the last month or so.

Is it fair to say that the first announcement was really rightsizing overheads given the fitness sale? And the second was more of a sort of a response to the market decline that we've seen of late? And then the second part of that question is, is there a more to come? Or do you have more flexibility if, for example, next year is not flat but were down five again next year?.

Yes. So I think, first of all, as you can imagine, that the scale of restructuring takes quite a long time to plan, and so none of it was reactive. I would say that, as you said, the corporate enterprise kind of functional reductions where a result of us rightsizing after the fitness sale.

But I would say that when you're in a business that is seeing growth for eight consecutive years, you're focusing typically on how to grow the business, and not necessarily how to fully optimize the structure.

And as I became the CEO, I wanted to make sure that we -- I like the fact that you never know what the markets are going to do, that we took a look at our enterprise cost structure on a very systematic basis, this is certainly not a reactionary basis, and made sure that we were as lean and fit as we could possibly be as soon as possible, entering the back half of 2019 and certainly 2020 and beyond.

So I think that this was a -- us taking a pause to look back at the cost structure that we had accumulated over eight years, and making sure that we restructured it to be as efficient as we possibly could be. Obviously, that gives us a much more robust position given the fact that the market conditions are somewhat lesser..

And Joe, if you're trying to gauge of the $17 million of cost reductions that was attached with the first announcement, that was G&A functions across the enterprise, about half of which was corporate, half of which is going to show up in the operating segments..

Our next question comes from Gerrick Johnson with BMO Capital Markets..

Hey, good morning.

So David, on a scale of one to 10, with 10 being most confident, how confident are you about achieving this $5 to $5.50 next year?.

Is there an 11 or 12 in the scale there?.

Sure..

I'm very confident..

Okay great.

And then how much of the cost-cutting actions are realized in your 2019 guidance?.

Well, the effects, obviously, are based into the back half. I don't know if I've got an exact number in here, Bill can probably pull it up..

You know, so I'm going to frame it this way, Gerrick.

So we got, for the year, through the cost-reduction actions we've taken, and decisions we've made relative to timing of when we're going to incur spending, as well as, kind of the temporary implications of the impact of performance on our variable compensation, we have reduced our spending plans for the year for '19, well in excess of the $50 million of cost reduction.

What we've done is we've effectively put action plans in place to make those all structural going into 2020. And of the $50 million, we've already acted on a very healthy portion of the $50 million. So it's not like we've got to execute and plan on it, we've already taken considerable action that makes that $50 million permanent..

Okay and then on propulsion.

Can you remind us what the ratio of repower sales are versus OEM sales in your propulsion business?.

It's about 15%. We have been slightly under that in the new platform because we've been -- I'm sorry, the new engine platform, the 175 to 300, because of we've been able to completely satisfy all the demand. But once we do, that will be back to 15% or above, I think.

The new platform was designed to be much easier to use for repower purchases, much less intrusive in the boats than the prior engine platform in that horsepower range. So we're probably a little bit trailing right now in the new platform, but we expect to get ahead of that when we get capacity..

Thank you. Your next question comes from Greg Badishkanian with Citi..

Great. Thanks.

I'm just wondering in terms of inventory levels, how do you think your competitors, at retail, their inventory levels are stocked? Are they -- do you think there's too much inventory for them as well?.

Yeah, Greg, I'll take that one. We believe and we understand from intelligence that we have, that we're probably a little bit better situated overall than the overall industry would be.

I think embedded in that comments going to be, you probably going to hear some folks who might be in a little bit better position but there's going to be folks who are a little worse.

And I'd say most of our challenges rely, again, I'll reiterate, are in the lower end value end of the aluminum, fish and pontoon categories, which we can get taken care of here in the second half of the year..

So to sort of follow on, if their -- let's say, inventories they may not be as well-positioned as you, your competitors at retail, are they being more aggressive in terms of discounting and promoting to have that sell-through? Or is it in line with you in terms of the year added discounts and promotions to the retailers?.

I think we have seen some more aggressive discounting. I think that -- but at this point in the year, we'll probably be similar, I would think..

We're similar..

All right. Perfect. Thank you..

Our next question comes from Eric Wold with B. Riley..

Thanks. Good morning, guys. Two questions kind of follow up on one that have been asked.

I guess, one, going back to Freedom Boats and thinking about the opportunity to boost Brunswick and Mercury penetration within the fleet, corporate and franchise, what could be the -- given that the mix in boats in the fleet, what you think the penetration can ultimately be kind of over the long runs are the boats and engines?.

I think we have boats brands and types that are able to satisfy the very large majority of the needs of the Freedom business. We -- since the acquisition -- a little before and since the acquisition, we've been doing deep dives into segmentation of boats across the franchise locations. Obviously, we knew what was in the company-owned locations.

But I think that there are no significant gaps that we can't fill certainly over time. So we will be -- and I think the other thing that we can offer here, as I mentioned earlier, that's really important to our franchisee. We've got fantastic Mercury engines.

We've got wonderful Brunswick boats, but we already -- we also have this range of technologies and financial services that can be extremely attractive to a franchisee.

And in those businesses, where they are certainly looking closely at their margins, we -- I think we can provide every incentive for our franchisees to want to work with not just our physical products, but also our services, which obviously expands the margins..

And I would point out that the financing side of this is not something that needs to be developed.

We've been developing this capability over the last three to four years as we've been piloting boat clubs, we've been developing this with our floor plan lending partner, and are extremely confident that that's something that can deliver benefit to the franchisees..

And there are no further questions at this time. I'd like to turn the call back over to Dave for some closing remarks..

Thank you very much. Well, thank you, all, for joining us. As we've mentioned at the start of this call, this is a pivotal time for Brunswick. We are delighted with the performance of our businesses despite, despite the market being a bit softer than we'd anticipated.

I think every portion of our business is on track with the strategic objectives that we had planned. And we are doing -- I think we're satisfying our shareholders with the aggressive share repurchases we've put in place, fully deploying the fitness sale proceeds and we're extremely excited about business performance.

We'll get through the back half of the year, get our pipelines in line and we're incredibly excited about the future and 2020. And we look forward to seeing many of you on the road in the next few months. Thank you..

Ladies and gentleman this does concludes today's presentation. You may now disconnect and have a wonderful day..