Brunswick Corp

NYSE:BC

Earnings Call Analysis

Brunswick Corp Despite Challenges, Targets Growth with Market Share Gains

In the third quarter, Brunswick Corporation faced a 20% decline in net sales compared to the previous year, reporting an adjusted EPS of $1.17. This decline was mainly driven by reduced wholesale orders amid a fluctuating marine market, though recurring revenue streams contributed significantly. For 2024, Brunswick anticipates net sales of $5.1-$5.2 billion and an adjusted EPS of approximately $4.50. Despite earlier hurricanes impacting operations and retail marine units down 10%, market share in the U.S. outboard engine market increased by 420 basis points. Looking towards 2025, Brunswick expects a stronger environment, projecting a flat market with potential upside.

Navigating a Challenging Waterscape

In the latest earnings call, Brunswick Corporation faced a tough environment but has managed to stay resilient. The company reported a 20% decline in net sales for the third quarter compared to the previous year, with adjusted operating margins just under 10%. Factors contributing to this decline include reduced wholesale ordering from dealers and OEMs, alongside cautious consumer behavior towards boating, exacerbated by higher interest rates and overall market uncertainty.

Financial Performance Overview

Brunswick's adjusted EPS for Q3 was $1.17, down from prior year levels. Year-to-date, sales have decreased by 19%, with an adjusted diluted EPS of $4.31, reflecting a 41% decrease. Despite these challenges, gross margins showed resilience, aided by cost control measures that delivered a reduction of over $15 million in operating expenses compared to 2023, even after accounting for the impact of acquisitions.

Segment Performance Insights

Breaking down the performance by segment, the Propulsion division saw a 32% drop in sales due to lower production rates from OEM boat manufacturers. However, this division outpaced the market, gaining approximately 420 basis points of U.S. outboard engine share, now boasting a total market share of around 50%. The aftermarket engine parts and accessories business thrived, achieving record operating margins of 26%. The Freedom Boat Club continues to grow, with steady membership sales growth and recent expansions enhancing its leadership in major boating states.

Impact of External Factors

External challenges, particularly two major hurricanes affecting the Southeastern U.S., posed a modest earnings impact estimated at $5 million to $10 million for the year. However, the company reported that its facilities were largely unscathed, and inventory levels were managed effectively through cautious production adjustments, maintaining a balanced pipeline of approximately 10,700 units.

Looking Forward: Guidance and Strategic Plans

Looking ahead, Brunswick expects full-year new boat retail sales to decline by approximately 10% compared to 2023, with cautious reordering from dealers and OEMs expected to persist. The company provided guidance for net sales between $5.1 billion and $5.2 billion, with an adjusted diluted EPS of around $4.50 for the year. Brunswick anticipates solid free cash flow, exceeding 80% conversion for the year, supporting ongoing share repurchase commitments totaling $190 million year-to-date.

Earnings Call Transcript 2024-Q3

[Operator]

Good morning. Welcome to Brunswick Corporation's Third Quarter 2024 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 Neha Clark Senior Vice President, Enterprise Finance Brunswick Corporation. You may begin.

[Neha Clark, executive]

Good morning, and thank you for joining us.

With me on the call this morning are Dave Foulkes, Brunswick's CEO; and Ryan Gwillim, CFO.

Before we begin with our prepared remarks, I would like to remind everyone that during this call, our comments will include certain forward-looking statements about future results. Please keep in mind that our actual results could differ materially from these expectations. For details on these factors to consider, please refer to our recent SEC filings and today's press release. All of these documents are available on our website at brunswick.com. During our presentation, we will be referring to certain non-GAAP financial information. Reconciliations of GAAP to non-GAAP financial measures are provided in the appendix of this presentation and the reconciliation section of the unaudited consolidated financial statements accompanying today's results.

I will now turn the call over to Dave.

[David Foulkes, executive]

Thanks, Neha, and good morning, everyone.

Our business has delivered solid results in the quarter as continued market share gains, wealth of new products and expanded contribution from recurring revenue businesses resulted in financial performance in line with expectations despite the challenging marine market. We continue to tightly manage field inventory across all our channels and have adjusted production accordingly, ending the quarter with 10,700 units in the U.S. pipeline, around 200 units below prior year.

Our third quarter results again demonstrated the resiliency of our portfolio with our recurring revenue businesses and channels, including our Engine P&A business, Propulsions Repower business, Freedom Boat Club and Navico Group's aftermarket sales contributing nearly 70% of our Q3 adjusted operating earnings.

As we enter the final months of the year, we estimate full year new boat retail unit sales to finish in line with our expectations of down approximately 10% versus prior year. With the core retail selling season behind us, and retail discounting levels remaining elevated, dealer reordering in some segments is slower than anticipated, leading most boat OEMs to maintain lower production rates, impact propulsion and Navico Group OEM orders. However, our aftermarket-based engine parts, accessories and distribution businesses and Freedom Boat Club continued to perform well, as boating participation remains strong.

Prudent capital management remains a priority, and we recently executed an amendment to our revolving credit facility, increasing the commitments to $1 billion and extending the maturity to October 2029. We also increased the size of our commercial paper program, committing the issuance of commercial paper notes also up to $1 billion to provide further capital flexibility. In addition, our businesses delivered strong cash flow, enabling us to complete $190 million of share repurchases year-to-date and maintaining our commitment to return value to shareholders.

Turning to some highlights from our segments in the quarter. As anticipated, our Propulsion business delivered lower sales and operating earnings versus the third quarter of 2023, but we continue to outpace the market at retail and gained 420 basis points of U.S. outboard engine share in the quarter. We are currently producing at rates significantly below retail as OEM customers maintain reduced bulk production schedules into the off-season. Our engine parts and accessories business had another strong quarter with record operating margins of 26% and with both the product and distribution businesses contributing to margin expansion despite slightly lower sales. The completed transition of engine parts and accessories distribution to our new state-of-the-art facility in Brownsburg, Indiana continues to provide efficiency and delivery time benefits enabling modest international sales growth versus the prior year quarter. As anticipated, Navico Group had lower sales and operating earnings versus the third quarter of 2023 and due to continued soft marine OEM order rates and retailers delaying aftermarket orders until closer to the holiday selling season, which was partially offset by slightly higher sales in the Europe, Middle East and Africa region. Our pace of product investments is showing benefits, including at the recent Cannes Yachting festival, where Navico Group's products were present on approximately 70% of bots exhibited. I'll provide more details on Navico Group new product introductions in a moment.

Finally, our Boat business had sales and operating earnings below the third quarter of 2023 consistent with lower planned production levels and fewer manufacturing days due to the extended summer shutdowns. Freedom Bulk Club continues to deliver steady performance with 3.5% year-to-date membership sales growth. In addition, we completed the acquisition of the South Florida franchise operations in territory, further solidifying Freedom's leadership position in the largest boating states in the U.S., and we expect to enter the Asian market in the near future. Navico Group is continuing to invest in and accelerate introduction of new products developed since the acquisition. The Elite FS 10-inch and 12-inch fish finders with live sonar and full networking capability launched today to fulfill the needs of consumers who desire larger screens with premium features at an affordable price. These products are amongst more than 20 new products introduced across the Navico Group portfolio year-to-date. Some of these new products are launching in time for the e-commerce and holiday season, and we expect them to contribute to some operating margin reexpansion in the fourth quarter, while a number of white space products opening expanded market opportunities.

In the third quarter, we launched the new Lawrence Eagle Eye 9, the first entry-level fish finder in the market offer live sonar capability. Even as we continue to rationalize its global footprint, we're also continuing to build Navico Group product development capabilities and expect to launch an additional 20 exciting new products over the next 3 quarters.

Turning to external factors. While the macroeconomic landscape is stabilizing, with inflation continuing to moderate unemployment generally remaining solid, we continue to monitor the escalating geopolitical tensions and election-related activities. The downward movement in interest rates in the U.S. and some other markets, since the beginning of the quarter is welcome and is already benefiting consumer financing costs and dealer floor plan costs. However, given the point in the current retail selling season, do not anticipate benefits until 2025. Dealer sentiment is generally stable but negative. Ordering remained cautious in most segments, and we do not anticipate any significant change entering the off-season curtailment holiday. Discounting and promotion levels remain elevated. However, our investments in our digital assets continue to drive solid lead generation and conversion. Despite these challenging conditions, our surveys do show some improvement in bulk purchase consideration, particularly among higher household income consumers. We continue to invest in and launched many exciting new products and technologies across all our businesses and product lines, with the intent to position us for market share gains and to ensure we have the freshest portfolio when the market returns to growth. As we all know, at the end of September and early October, Florida and the Southeastern U.S. experienced 2 major hurricanes. While Brunswick has a strong presence in Florida, it was only a minor direct impact to our facilities, though production and distribution halted at some locations for approximately 3 days for hurricane preparation and in a few cases for power outages. Brunswick supplies in the region were also largely unimpacted. Of the approximately 100 corporate and franchise owned Freedom Boat Club locations in Florida, only 4 remain closed for infrastructure repair exiting October. Some Brunswick channel partners incurred damage to their facilities, which, in combination with direct impacts to boaters and consumers in the area will have a modest short- to midterm impact. We estimate a full year operating earnings impact of $5 million to $10 million. Brunswick is providing financial support, supplies and essential needs to impacted employees and communities.

Moving now to U.S. industry retail performance. U.S. outboard engine industry retail units declined 10% in the third quarter versus prior year with Mercury Marine outperforming the industry at down just 1.8%. As mentioned, Mercury Marine continues to gain share. delivering approximately 50% U.S. outboard engine market share in the third quarter. We are diligently monitoring but pipeline levels and continue to under ship retail, exiting the third quarter with 10,700 units in the U.S. pipeline, slightly below prior year. We ended the third quarter at 32 weeks on hand with premium fiberglass pipelines remaining well below historical levels.

I'll now turn the call over to Ryan to provide additional comments on our financial performance and outlook.

[Ryan Gwillim, executive]

Thanks, Dave, and good morning, everyone.

Brunswick's third quarter results were in line with expectations but remained below prior year due to the continued challenging U.S. retail marine market versus the third quarter of 2023, net sales in the quarter were down 20% with adjusted operating margins of just under 10%, resulting in an adjusted EPS of $1.17. As mentioned, our results in the quarter again demonstrated the resiliency of our portfolio with our recurring revenue businesses and channels contributing a significant portion of the operating earnings this period. Third quarter sales were below prior year as the impact of continued lower wholesale ordering by dealers and OEMs, combined with higher accounts in certain business segments was only partially offset by annual price increases and benefits from well-received new products. Operating earnings were down versus prior year as a result of lower sales and the impact of lower absorption from decreased production levels, partially offset by new product momentum annual price increases and ongoing cost control measures throughout the enterprise.

On a year-to-date basis, sales are down 19%, resulting in an adjusted diluted EPS of $4.31, down 41%. Gross margin performance remained steady despite the top line softness, while operating expenses are down more than $15 million versus 2023 levels even after absorbing the impact of acquisitions as the entire enterprise remains focused on reducing controllable costs. As a reminder, we are making conscious decisions to ensure field inventory levels for all our businesses remain appropriate and have scaled production accordingly. Year-to-date production for output output engines, 75-horsepower and above is down 29% versus 2023 with boat production down 34%.

Now we'll look at each reporting segment, starting with our propulsion business. Sales in our Propulsion segment were down 32%, with lower production rates at OEM boat manufacturers, resulting in lower engine orders in the quarter versus the prior year quarter. As Dave mentioned earlier, despite lower wholesale orders as we anticipated, we continue to take market share and outpace the overall market performance. Adjusted operating margins were below prior year, primarily due to the impact of lower net sales and lower absorption from declines in production, partially offset by cost control measures. Our aftermarket-led engine parts and accessories business had another strong quarter with record adjusted operating margins, leading to strong operating earnings growth versus the third quarter of 2023 despite slightly lower year-over-year sales. The completed transition to our new state-of-the-art facility in Brownsburg, Indiana continues to provide efficiency and delivery time benefits, which enabled modest international sales growth versus the third quarter of 2023.

Our U.S.-based land and sea distribution business also continues to take market share, gaining 60 basis points of share in the last 12 months culminating in September, where they delivered their highest ever single month market share of just under 50%.

Navico Group reported a sales decrease of 14%, primarily driven by reduced sales to marine OEMs, resulting from lower boat production levels to match retail ordering patterns partially offset by slight international sales growth and strong new product momentum. Segment operating earnings decreased as the impact from lower sales was only partially offset by lower operating expenses.

Finally, our Boat business had sales and operating earnings below the third quarter of 2023, consistent with lower planned production levels and fewer manufacturing days due to the annual summer shutdowns. Sales were down 19%, resulting from lower wholesale orders as channel partners continue to order cautiously and higher incentives and discounting were only partially offset by the favorable impact of modest model year pricing. Segment operating earnings were within expectations as the impact of net sales declines and lower absorption from the reduced production was partially offset by pricing and continued cost control. Freedom Boat Club, which contributed 12% of the segment sales in the quarter continues to deliver steady membership sales growth and completed its acquisition of the Southwest Florida franchise operations and territory further solidifying its leadership position in the largest voting state in the U.S.

Turning to guidance. We are not anticipating any change in market conditions for the fourth quarter and are responding by continuing to moderate production to ensure inventory levels in the channel remain appropriate, setting us up for what we anticipate as a stronger 2025. In addition, we anticipate both dealers remaining cautious in taking on product before early 2025 boat show season, especially knowing that we have manufacturing capacity available to get them product early in the 2025 retail season. Similar to our own boat business, OEM customers of Mercury and Navico Group to moderate production resulting in softer wholesale conditions. As Dave discussed earlier, a modest negative earnings impact from the hurricanes that impacted Florida and the Southeast U.S. Our recurring revenue business is continuing to remain steady, albeit with normal seasonality impacting sales volumes; and lastly, Q4 production continuing to trail 2023 levels.

The result is the guidance you see on this slide, including net sales of $5.1 billion to $5.2 billion and adjusted diluted EPS of approximately $4.50. Free cash flow continues to be solid despite the lower earnings with free cash flow conversion expected to be north of 80% for the year.

I will now pass the call back to Dave for concluding remarks.

[David Foulkes, executive]

Before we conclude, despite the challenging market, I am thrilled to highlight the exceptional accomplishments of our teams from across the enterprise that were recognized with a record high number of awards in the third quarter. We've now surpassed the 100 major enterprise awards for the third consecutive year. Brunswick was named one of the world's best companies by Time Magazine, and we continue to win global awards for our products around the world. Sea Ray won the Motor Boat Magazine Motor Boat of the Year Award for its new 190 SPX model. Motor Boat is the largest marine publication in France. Also, Flite recently took on 4 Australian Good Design Awards, including a best-in-class winner for its Marc Newson collaboration. During IBEX in October, Navico Group won the IBEX Innovation Award in its category for the Lenco Pro-control Boat Stabilization system. Mercury received an honorable mention in the same category for its new Precision Joystick system. And finally, safety on and off the water remains our top priority. So it was very rewarding to receive 4 National Boating Safety Awards. 2 for our boat class business and 1 each for our Freedom and Bayliner.

Finally, we are very excited about the upcoming Fort Lauderdale Boat Show, which we will be debuting many industry-leading new products. Boston Whaler will launch the all-new 330 Vantage, the new flagship model in the Popular Vantage series. Sea Ray will show 3 all new models in its SDX line, all powered by Mercury outboard engines, and we will officially debut the first models in our new [ Nevan ] premium Adventure product line in the U.S.

Thank you for your attention. We'll now open the line for questions.

[Operator]

[Operator Instructions] Our first question is from Matthew Boss with JPMorgan.

[Matthew Boss, analyst]

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

[David Foulkes, executive]

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

[Ryan Gwillim, executive]

Yes. Matt, how are you? Ryan here. '25, I think our story is pretty similar to what it was on the July call, maybe just moved up 90 days or so. We still think that 2025 on balance is likely to see healthier economic conditions, for our consumers, lower interest rates, unemployment, it continues to be relatively low. GDP that is continue to be positive. Obviously, a little bit of uncertainty here in the next 90 days, certainly with the election, maybe extending into the first quarter. But all in all, macros in consumer, probably in the plus column. And then you have to ask yourself what you think the market is going to do the marine market. We're going to end the year this year at about 140,000 units here in the U.S., which is really only about a handful of percent above where we were on a unit basis coming out of the GFC. And so we all think it's relatively reasonable to assume that a flat market to this year is definitely doable with probably an upside from there. And time will tell what that looks like low single digit, mid-single digit. But certainly probably a little bit biased to the upside from a market. Certainly, when you look at retail being about 50% of replacement level, which continues to be at. And then you add into a positive pipeline dynamics. We -- in most scenarios, even in a flat retail market next year, we would assume that wholesale would be up for us in both boats and engines. And again, how much up would depend on where it lands at the end of this year and what you think retail does. But we still think wholesale would be up. And then lastly, I'd say there's a few things that Brunswick just is unique on. We have market share gains with Mercury with new products on the horizon, continued stable growth on Engine P&A. I don't think we talk about it enough or given enough credit this is a business that had 26% operating margins in the quarter, a record and continues to drive recurring aftermarket earnings and revenue for us. That will continue to drive stability next year. significant new products. You've heard from Dave on things that are just coming out over the next handful of months, and that will continue into next year. I think we've taken $100 million of OpEx out from our original budget this year. And we're down $50 million year-to-date, and that's including absorbing about $20 million of acquisition impact we'll be able to keep a portion of that out. Obviously, some things will come back in, including reset of comp, a tariff environment that may be a little worse. But on balance, still good from a cost perspective. And then we continue to drive cash. And I think a lot of the things we're doing here in the back half of '24 will give us cash benefits this year, but also cash benefits next year, which will be helpful certainly in whatever environment were that's thrown at us. So on bounce, I do think there's more reasons to think that 2025 is a growth year for us on ETS. I think it would be second half based and second half loaded as comps get a little easier and the economics of helps the consumers seem to be better. But that's still our heads at 2025, a growth year off of '24.

[Matthew Boss, analyst]

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

[Ryan Gwillim, executive]

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

[Operator]

Our next question is from James Hardiman with Citi.

[James Hardiman, analyst]

Great line of questioning there, and I think some great answers. I wanted to dig in a little bit more on the inventory piece. So it seems like retail is playing out largely as you anticipated 90 days or so ago. And yet we've got a pretty steep cut to the fourth quarter. So should we interpret that as you expect to finish the year even lower on inventories than you previously did? I think there was some discussion about a 1,500 unit reduction for the year. Where does that number stand today? And I think the answer to this is yes, based on what you said in the previous response, but one-to-one wholesale to retail is the general sort of assumption for next year as we sit here today?

[Ryan Gwillim, executive]

Yes, James, this is Ryan. I think that's a good assumption to start the start of the year. You are correct on your global boats being wholesale exceeding retail by about 1,500 units to about 1,000 in the U.S. So pipelines, we will continue to take boats and engines out of the pipeline. You're going to see you're going to see wholesale trailing retail about about 20,000 units on the engine side in the U.S., just as another number. So I don't think there's been any change really in our view on pipelines, except to make sure that we're balancing a retail environment that's that's shaping up as we anticipate. The real change, as Dave said, is, I think, the last quarter is going to be just very cautious in terms of orders from our channel partners across the entire product display, and we're just seeing cautiousness because we have the ability to get them on it quickly. We can get folks products here at the beginning of the retail season. If boat shows end up outperforming maybe initial expectations we can get boats out quickly in the beginning of the year. So all of that is leading to just cautiousness in the -- in our channel, and we'll be ready to supply product once the orders come in.

[James Hardiman, analyst]

Understood. And then to the question on 2025, it sounds like you're confident that this you'll be up next year on an earnings basis. I think you're pretty confident about that 3 months ago. Now '24 has come down, call it, $0.75, and so I guess, I'm trying to think through, should we be lowering them? Is the view on 2025 today any lower than it was 3 months ago? Or how should we think about that in light of the cut to '24. Does that impact '25 in any meaningful way?

[David Foulkes, executive]

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

[Operator]

Our next question is from Megan Alexander with Morgan Stanley.

[Megan Christine Alexander, analyst]

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

[David Foulkes, executive]

At the end of the quarter, I think it's 32 weeks, came out of the quarter and that...

[Ryan Gwillim, executive]

32, yes, in the U.S.

[David Foulkes, executive]

32 in the U.S. probably end up in a -- we'll end up in the high 30s by the end of the year. I think the exact weeks on hand is getting bit more difficult to predict because the unit implications of 1 week on hand is now like 200 or 300 units. So I would just say that it remains in the high 30s in the U.S. and probably pipelines are always a little bit higher in Europe, particularly in some of the regions. So we'll probably end up in the 40-ish range globally.

[Megan Christine Alexander, analyst]

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

[David Foulkes, executive]

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

[Megan Christine Alexander, analyst]

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

[David Foulkes, executive]

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

[Ryan Gwillim, executive]

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

[Operator]

Our next question is from Fred Wightman with Wolfe Research.

[Frederick Wightman, analyst]

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

[David Foulkes, executive]

Yes. I would say, no, it's good quarter for us, but I would say the 130 basis points year-to-date is a thing to focus on really -- we mentioned that in this environment. There are a lot of unusual dynamics as OEM production modulates to protect inventory and other things in the balance of the year. So obviously, it's really exciting when we see numbers like 400 basis points, and we have a great product line. especially since our competitors have launched some products in the last year or so, it's nice to see us continuing to do well on share. We expect to continue to do well in share at the upcoming Fort Lauderdale Boat Show. But I would probably anchor a bit more on the 130 basis points year-to-date.

[Frederick Wightman, analyst]

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

[Ryan Gwillim, executive]

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

[Operator]

Our next question is from Craig Kennison with Baird.

[Craig Kennison, analyst]

Dave, you mentioned the survey that you conducted with both consumers. I'm just wondering if you could shed some light on any more details about purchase intent. And I'm curious how predictive that survey has been in the past?

[David Foulkes, executive]

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

[Operator]

Our next question is from Mike Swartz with Truist Securities.

[Michael Swartz, analyst]

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

[Ryan Gwillim, executive]

Yes, Mike, I'll take this one. Yes, I mean, obviously, great quarter, just highlighting the stability here of this business. I do think this is a business that's marched right up to 20% operating margins for the full year. And obviously, that's a pretty good milestone. A lot of it just depends on mix within the distribution versus product side. Obviously, the products part of the business pulled some really strong gross and operating margins. And distribution, although it's a pretty strong third-party distribution business, it is still a third party. So it's a sell-through business where margins are lower. So a lot of the quarterly dynamics depends on where you stand from a distribution versus product mix standpoint. I will say the one thing that's really shown through is the transition of Brownsburg, Indiana is complete, and we are now getting more product out quicker at a better cost. And all 3 of those things are beneficial to margins, right? More product out quicker and being able to go around the world solely to our international customers. So yes, it's fair to say you're not going to see 26% every quarter. But certainly, where there's value, we now know that we can get the product out at the right cost and get it out quickly so that our general partners have what they need. So you should anticipate continued margin, stability and growth there as we go into '25.

[David Foulkes, executive]

We've taken quite a bit of cost out of that business. It's very efficient. I would say that the -- maybe the weather in the late summer and fall has been pretty nice. I don't actually even in October, we're seeing some really good voting activity. So that's possibly a part of a boost as well.

[Michael Swartz, analyst]

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

[Ryan Gwillim, executive]

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

[Operator]

Our next question is from Xian Siew with BNP Paribas.

[Xian Siew Hew Sam, analyst]

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

[David Foulkes, executive]

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

[Ryan Gwillim, executive]

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

[David Foulkes, executive]

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

[Xian Siew Hew Sam, analyst]

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

[David Foulkes, executive]

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

[Operator]

Our next question is from Joe Altobello with Raymond James.

[Joseph Altobello, analyst]

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

[David Foulkes, executive]

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

[Joseph Altobello, analyst]

Okay. That's helpful. And just kind of a follow-up on that. Can you speak to the decision that you made to pull back on promotions in Q4. I think you wanted to avoid what you call excessive wholesale pull forward. Were you seeing an indication that dealers were actually looking to take orders up in Q4?

[David Foulkes, executive]

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

[Operator]

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

[David Foulkes, executive]

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

[Operator]

Thank you. This will conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.