Brunswick Corporation Q2 FY2025 earnings call

• Brunswick delivered strong second quarter results with sales of $1.4 billion, up slightly from prior year, and earnings per share of $1.16, both exceeding guidance. Record free cash flow of $288 million in Q2, $244 million YTD. - Segment performances: Propulsion had strong sales growth, Engine Parts and Accessories steady, Navico Group sales down but improving, Boat had lower sales but market share gains. - External factors: Interest rates steady, foreign exchange tailwinds, One Big Beautiful Bill Act benefits, tariff exposure monitored and mitigated. - New product launches: Navico's AutoTrack technology, Harris Pontoons Sunliner, Rayglass Protector R Edition, Sea Ray SDX 230, Mercury's new outboard engines. - Awards and sustainability: Recognitions for products, innovation, and workplace, released 2024 Sustainability Report.

Propulsion: Delivered strong year-over-year sales growth, with shipments to U.S. OEM customers outpacing expectations. Sales up 7%, including 11% outboard engines. Mercury's outboard engine lineup gained market share. Engine Parts and Accessories: Slight year-over-year sales growth, steady earnings despite weather-affected start to the boating season. Navico Group: Slightly lower sales versus Q2 2024, but sales trends improved each month in the quarter. Earnings consistent with Q1 levels. Boat: Lower overall sales mainly due to weakness in value categories, but outperformed the market in some key categories, delivered 30 new model launches year-to-date, rationalized value fiberglass model lineup by 25% for 2026. Freedom Boat Club continued profitable growth with a club in Dubai.

• Full-year guidance: Anticipated sales of approximately $5.2 billion and adjusted EPS of approximately $3.25, holding the midpoint of guidance. Free cash flow guidance raised by $50 million to greater than $400 million. - Debt reduction: Increased 2025 debt reduction target to $175 million, on track to retire $350 million since 2023, aiming for long-term net leverage target below 2x EBITDA.

• Tariffs directly impacting earnings and adding uncertainty, potential retaliatory tariffs from the EU and Canada on U.S. manufactured boats and engines/parts, disruption of capital markets affecting consumers.

Q: 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?

A: 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.

Q: 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.

A: 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.

Q: 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?

A: 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.