Brunswick Corporation ($BC)

Good morning, and welcome to Brunswick Corporation's First Quarter 2026 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 Stephen Weiland, Senior Vice President and Deputy CFO, Brunswick Corporation.

Good morning, and thank you for joining us. With me on the call this morning are David Foulkes, Brunswick's Chairman and CEO; and Ryan Gwillim, Brunswick's CFO. Before we begin with our prepared remarks, I would like to remind everyone that during this call, our comments will include certain forward-looking statements about future results. Please keep in mind that our actual results could differ materially from these expectations. For details on 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 will be referring to certain non-GAAP financial information. Reconciliations of GAAP to non-GAAP financial measures are provided in the appendix to this presentation and the reconciliation sections of the unaudited consolidated financial statements accompanying today's results. I will now turn the call over to Dave.

Thank you, Steve. We delivered an excellent start to the year, building on the market recovery in the second half of 2025, with first quarter results significantly ahead of expectations despite the dynamic geopolitical and tariff environment. Global and U.S. boat retail were approximately flat on a unit basis compared to the relatively strong first quarter of last year and premium sales were up. Q1 was the third consecutive quarter of improved relative retail performance, building confidence in our retail forecast for the year as we move into the core selling season in our largest markets. Strong OEM order patterns drove gains for Mercury Marine and Navico Group, while solid boating participation benefited our recurring revenue, parts and accessories, aftermarket and subscription voting businesses. From an inventory perspective, both an engine pipelines remain healthy, lean and well aligned with demand. Global boat pipelines are down approximately 2,000 units versus last year and flat sequentially versus the end of 2025, reflecting our deliberate actions to closely match wholesale with retail. Our overall net sales of $1.4 billion increased 13% year-over-year with growth across all segments driven by continued market share gains, strong OEM demand, accelerated new product and technology introductions and disciplined operational execution across the enterprise. Our adjusted earnings per share of $0.70 increased 25% versus last year, with strong operating leverage from higher sales, more than offsetting the impacts of the tariffs implemented after the first quarter of last year. We continue to execute our disciplined capital allocation strategy, repurchasing $20 million of shares year-to-date and delivered our 14th consecutive annual dividend increase, underscoring our commitment to returning capital to shareholders while maintaining a strong balance sheet. In our core U.S. market, product demand and boating participation remain relatively unaffected by the conflict in the Middle East, although the health of the value consumer remains a focus. We have a relatively small direct exposure to Middle East markets, but are monitoring trends in Australia and New Zealand and other more exposed markets as oil supply tightens. Our high exposure to the most insulated markets, particularly the U.S. and Canada, which account for more than 70% of total sales, balanced portfolio, lean channel inventories and operational discipline position us strongly to effectively navigate the volatility. Turning to segment performance, for the third consecutive quarter, all segments delivered year-over-year sales growth. Operating margin expanded across the portfolio, except for Propulsion, which absorbed the majority of first quarter incremental tariffs. The strong performance reflected improving retail and wholesale trends, sustained boater participation and disciplined operational execution across the organization. Propulsion sales increased significantly versus last year with Mercury's global and U.S. outboard unit orders increasing more than 15% over the prior year period and record Mercury outboard share at recent boat shows, including 60% overall and 80% on the water share at Miami and 70% share at Palm Beach signaling the potential for further high horsepower share gains. Overall, R12 share remained steady at 47%, with year-to-date retail share up 200 basis points along with strong wholesale share gains. Our accelerated investments in future high horsepower outboard platforms and all new midrange high-volume models will reinforce our long-term competitive advantage. Healthy boater participation and continued distribution gains drove higher sales and margin year-over-year in our Engine P&A business with Land and See again increasing U.S. distribution share by 150 basis points. Navico Group delivered revenue growth and margin improvement, supported by new product launches and operational improvement actions. We introduced the Simrad NSO 4 and B&G Zeus SRX multi-function displays at the Miami Boat Show, received an innovation award for the Lowrance Active Target 2XL fish finder and continue to execute Simrad AutoCaptain implementation plans with a range of OEM customers. Finally, our Boat Group segment grew sales and margin as wholesale shipments aligned with stable retail. Boat show revenue increased year-over-year despite weather impacts of some upper Midwest and Northern market events. At the Palm Beach premium, saltwater show, Boston Whaler and Sea Ray delivered high unit sales and a substantial 40% revenue increase versus last year. Freedom Boat Club added 4 new locations in the quarter, increased member trips by 20%, improved same-store sales by 10% and earlier this month completed the acquisition of the largest remaining franchise club in the Freedom network, which serves the Boston and Cape Cod region. Moving on to external conditions. Rate cuts enacted late in 2025 are a continuing tailwind for retail and floorplan financing as we enter the peak selling season. While expectations for incremental rate relief have moderated, our forecast does not rely on additional cuts. Fuel prices have risen recently, due to geopolitical events, but generally remain within historical bounds, and we are not experiencing any clearly discernible direct impact on retail or OEM demand or on boating participation in our largest markets. The tariff environment remains dynamic, and Ryan will discuss the specific impact to our guidance later on the call. The tariff on Mercury Marine's Japanese competitors remains in place representing a potential structural advantage for Brunswick. Refunds related to previously paid, IEEPA tariffs are not yet factored into our outlook. Current dealer sentiment has improved overall, but still cautious, supported by healthy and fresh inventories and lower pre-owned boat supply, which supports new boat demand. While incentives remain elevated versus historical norms, they improved approximately 100 basis points last year, and we are forecasting further modest improvement in 2026. Looking now at industry retail performance. The latest SSI data for March shows U.S. industry main Powerboat retail down approximately 5% year-to-date. Against this backdrop, SSI reported that Brunswick outperformed the industry. Our global and U.S. internal retail unit sales were approximately flat year-over-year compared with the relatively strong first quarter of 2025 prior to the impact of tariffs with premium and core again outperforming value. From a pipeline standpoint, conditions remain very healthy. Global Boat pipelines are down approximately 2,000 units versus last year, but flat sequentially versus the fourth quarter and benefiting from wholesale to retail alignment consistent with our plan. In addition, our global boat order backlog at the end of the first quarter represented 71% of our second quarter wholesale forecast, up 6 percentage points from last year, providing improved near-term visibility. Turning to engines. U.S. outboard engine industry grew 6% in the first quarter with Mercury retail units of approximately 11%. With a similar dynamic to boats, U.S. outboard pipelines were down approximately 10% versus last year, but flat sequentially versus the fourth quarter reflecting wholesale to retail matching. Overall, the combination of sustained share gains, disciplined pipeline management and improving wholesale to retail alignment, gives us confidence in our outlook for 2026 and supports our expectation for a flat to improving market as we enter the peak boating season. Finally, I want to address the impacts of recent oil price volatility, which has been a frequent topic in recent investor discussions. From the boat buyer or boater perspective, historically, there has not been a correlation between oil price spikes and boat sales or boating participation. A primary driver of this low correlation is that fuel costs represent a relatively small portion of total boat ownership expense because on an annual basis, the typical recreational only uses about 20% to 30% of the fuel of a comparable passenger vehicle. From a boat group perspective, exposure to oil-linked materials is relatively small representing a combined 2% of total cost of goods sold and with the relevant materials being under long-term supply agreements. Our scale and sophistication also enable hedging programs for other key commodities, such as aluminum, further reducing exposure to spot-price volatility. However, aluminum prices do remain elevated. Diesel prices have, however, impacted boats and other transportation costs, and we have implemented some surcharges. I'll now turn the call over to Ryan to discuss our first quarter financial performance and updated guidance.

Thank you, Dave, and good morning, everyone. Brunswick's outstanding first quarter performance came in ahead of expectations with strong sales and earnings growth versus the first quarter of last year. On a consolidated basis, sales were up 13%, reflecting improved wholesale and retail trends, continued market share gains in propulsion and several boat categories, strong OEM demand for propulsion components and electronics, favorable changes in foreign currency exchange rates, pricing actions in each segment commencing in the second half of 2025, and solid boating participation driving aftermarket performance. Adjusted operating earnings were up 15%, supported by the increased sales, favorable mix, improved absorption and disciplined cost management more than offsetting the impact of incremental tariffs implemented after the first quarter of last year. Absent the year-over-year enterprise impact from incremental tariffs, adjusted operating leverage was approaching 30%, driving adjusted EPS of $0.70 for the quarter. Free cash flow was negative in the first quarter, consistent with seasonal and historical patterns, reflecting higher production levels and working capital investment ahead of the peak selling season. Compared to the prior year, free cash flow was down solely due to reinstated variable compensation paid in the quarter. Moving to our segments. Propulsion delivered a very strong start to the year with sales increasing 17% versus the prior year, driven by an improved market, global share gains and strong OEM demand heading into the selling season. Adjusted operating earnings declined year-over-year, solely due to the planned accelerated investments in product development and incremental tariff impact, which slightly more than offset the benefits of higher sales and improved absorption. Absent the incremental tariffs, pro forma adjusted operating leverage for propulsion was north of 20% in the quarter even after accounting for the high single-digit million dollars of additional product development spend in the quarter. Moving to engine parts and accessories. This segment once again delivered growth from its aftermarket high-margin recurring revenue portfolio with sales up 14% versus the prior year with significant growth across both products and distribution. Healthy early season boating participation even with the recent increase in fuel prices and continued market share gains in our global distribution business drove growth in the quarter. The higher sales and robust adjusted operating leverage at 27% and led to a 24% increase in adjusted operating earnings with a 140 basis point improvement in adjusted operating margin. Navico Group had another great quarter, transitioning from stability to growth with sales up 7% over prior year and up across all business lines, supported by improving OEM demand, steady aftermarket performance and operational efficiency. More importantly, adjusted operating earnings increased 64% with adjusted operating margin expanding 280 basis points, reflecting the early benefits of product portfolio optimization, operational improvements and disciplined cost control actions, which more than offset incremental tariffs. We often discuss the inherent operating leverage in this high gross margin business so it's fantastic to see 47% adjusted operating leverage in the quarter as our actions bear fruit. We continue to see encouraging traction from recent product launches, including Simrad NSO 4 and B&G Zeus SRX, and recognition for innovation with Lowrance Active Target 2XL. While there is still work ahead, the results this quarter reinforce our confidence that Navico Group is on a sustainable path towards improved profitability. Finally, our Boat segment also had a strong quarter with sales up 6% over prior year, driven by higher wholesale shipments matching stabilized retail conditions, favorable mix and continued momentum in the business acceleration portfolio. Boat growth was led by our aluminum fish and pontoon brands while Freedom Boat Club continued to deliver strong increases in members, trips and locations, as mentioned earlier. Adjusted operating earnings increased 63% and adjusted operating margin expanded 130 basis points, reflecting healthy adjusted operating leverage of 25%, primarily driven by the higher sales and favorable mix. Dealer pipelines remain very lean with mostly current model year product while positioning the business heading into the prime retail season. Lastly, I will discuss our updated outlook for 2026. As we enter the core retail selling season in the U.S., we are encouraged by the stable market conditions and the strength of our first quarter performance. Steady dealer and customer sentiment, exceptionally healthy and lean pipelines, disciplined wholesale to retail alignment and sustained boating participation are sources of confidence as we move through the remainder of 2026. However, while direct sales and operational impacts remain limited, heightened geopolitical volatility has introduced new uncertainties. Earlier, Dave discussed the muted impact to date caused by fluctuations in interest rates and fuel prices, but we remain cognizant of the potential impact on the health of our consumer, especially outside the U.S. from a prolonged conflict in the Middle East. Finally, the tariff environment remains dynamic. And during the quarter, IEEPA tariffs were repealed and replaced a Section 122, and more recently, Section 232 tariffs on steel and aluminum were amended. The net impact of these changes is positive, and we now believe our full year incremental net tariff impact will ultimately land near the lower end of our original $35 million to $45 million estimate shared at the beginning of the year. Also, as, Dave mentioned, refunds related to previously paid IEEPA tariffs are not yet factored into our outlook or recognized in our financial statements. The result is materially unchanged guidance on the sales, margin and free cash flow lines, but an increase to adjusted EPS guidance to $4 to $4.50 reflecting the lower full year expected incremental net tariff impacts I just discussed as well as the first quarter overdrive while also factoring in some cautiousness given the current dynamic macroeconomic environment. Overall, we believe our guidance reflects confidence in our operating plan, the resilience of our portfolio and our ability to generate strong financial performance and a flat to slightly up retail environment. I'll now pass it over to Dave for concluding remarks.

Thanks, Ryan. I want to highlight some exciting recent developments in one of our fastest-growing businesses, Freedom Boat Club. As you know, Freedom is a profitable, high-growth recurring revenue business but continues to expand boating participation by making boating more accessible to a broader demographic. The model drives extensive synergy sales across the Brunswick portfolio, including through the purchase of Brunswick Boats Mercury Marine engines, parts and accessories and Navico Group products resulting in approximately $300 million of enterprise synergies since the 2019 acquisition. Since the acquisition, we've also grown the location count from 170 locations to 446 global, corporate-owned and franchise locations, adding 4 more locations in the quarter. Last year, Freedom members made 640,000 trips in the U.S. Earlier this month, we announced the acquisition of the largest remaining franchise club in the Freedom network, serving the Greater Boston and Cape Cod region. This acquisition adds 21 locations for our corporate-owned total as well as a strategic maintenance operations center that will drive synergies with other nearby corporate locations. It is also day-one accretive to earnings. Innovative new products and advanced technologies are central to Brunswick's long-term value creation, differentiation and share gain strategy. And during the quarter, we introduced many exciting new products across our portfolio, including the all-new Sea Ray SLX 360 and Boston Whaler Outrage 330 and 290 models with Mercury Power and Navico Group Electronics; Simrad's NSO 4 multifunction display with NEON Android operating system. Mercury's advanced keyless engine start system and innovative Boost over-the-air outboard performance upgrade and Fliteboard's RACE ultra-high-performance model. All these products illustrate our commitment constantly pushing the boundaries of marine innovation. Finally, I want to highlight the continued recognition our teams and brands are receiving across our enterprise. Through the first quarter, Brunswick has already secured nearly 50 awards and remains on track to surpass 100 awards again in 2026. This recognition spans product innovation, workplace culture, leadership and corporate reputation and reflects the strength and consistency of our operating model and values. We are appreciative of having received many national awards now for multiple years but notably, for the first time in 2026, Brunswick was named the Fast Company's most Innovative Companies list, reflecting the wide recognition for our industry-leading innovation. Thank you again to all our talented Brunswick employees who make this recognition possible. Before we open the lines for questions, I want to close by thanking our customers, channel partners, employees and shareholders for their continued strong support. We are also excited to announce our Brunswick Investor Day, which will be held on August 11 of Mercury Marine's global headquarters in Fond du Lac, Wisconsin. The event will include a facility tour, on-water product experiences and a live Q&A with Brunswick senior leaders. In advance of the event of prerecorded video strategy presentation will be published to our website. For planning purposes, I kindly ask that you register your interest in attending using the contact information on this slide. Thank you for your attention. We'll now open the line for questions.

[Operator Instructions] The first question is from Craig Kennison from Baird.

It really involves Mercury, you continue to pick up market share in a soft market, which could lead to a record volume and a cyclical recovery. And then you also appear to have a winning product cycle and some tariff-related tailwinds. So I'm just thinking with all of that in mind, if you could give us an update on your capacity utilization and your ability to handle additional volumes if they were to surge and then provide a framework for thinking about incremental margin in that business?

Thanks, Craig. Great question. Yes. Mercury is continuing, as you said, to gain share. And really, we have a fantastic product. And what's interesting, I think, is I think that there was some belief at a point in time, maybe a year or 2 years ago, that some of the share gain was temporary because of supply constraints and other things. But clearly, it's not. It's very structural. We have the best product line. And as you've heard, we are investing even more in 5 new outboard platforms from midrange up to new extensions to our high horsepower range. It is very exciting. We are well capacitized after the investments that we made in 2019, 2020, 2021 to support all of the foreseeable volume. We do not anticipate any major additional investments to be able to support volume certainly in the next year or so. So yes, we're very excited about that. As you heard from Ryan and I'll maybe turn over to him. Mercury is leveraging up very nicely. And absent the tariffs, I think we're -- but, Ryan, maybe you want to take over the leverage numbers?

Yes. I mean we are obviously -- we always quote more than 20% operating leverage. Obviously, with tariffs, that number gets skewed a little bit, but we would have been approaching a 30% number in the quarter had we not had the tariff impact. And that is not encompassing the additional spend that Dave mentioned, where high single-digit million quarter-over-quarter versus Q1 of '25 to really supercharge those engine programs.

Next question is from James Hardiman from Citi.

So I was wondering if you could maybe walk us through sort of demand trends that you've seen to start the year. Last time you reported, it sounded like January was off to a really, really strong start. And I think you guys have spoken to really a continuation of that in February. And so as I think about sort of a flattish first quarter I think that means that March must have been down, but then maybe speak to what you've seen in April? And particularly, I think what everybody is just trying to figure out obviously, you had a war that started, right, the end of February, beginning of March. I don't know if the narrative is that things sort of maybe slow down a little bit and have since recovered in April. But you guys have certainly spoken to sort of stable market conditions. Obviously, from month to month, that can look pretty different. But maybe just walk us through the trends.

Yes. Thank you, James. Yes, I would say -- but of course, monthly volumes are quite a lot different as we go through the year with March volumes being higher than January and February. And I think overall, as we said, we did see some high early volumes in January, which have stabilized over the balance of the quarter. Whether there was any real impact of the conflict. It's very difficult for us to determine. But yes, for us, the quarter ended effectively flat both globally and domestically. I wouldn't -- I would also note, though, that we continue to see this trend of premium outperforming value. And so if there was some additional pressure in the quarter or hesitation caused by the conflict, it likely impacted the value by more than the premium buyer. As we've gone into April, we are up year-over-year or month-over-month, if you like, a month this year over April last year which is what we would have expected, to be honest, given the Liberation Day pause that really happened last year. So yes, we're encouraged by the start to the second quarter. And at the moment, that trend seems to be continuing as we look kind of week over week. Also with continued strength on the premium side, particularly. But as you saw, we did see some really good sales on the -- in our aluminum products as well, particularly our prealuminum products. So yes, we're flat. I guess, I mean, the other thing to note is that SSI data showed some depths in the first couple of months of the year and is now kind of converging more back to a flattish market, I think, is more as they report more months, and we would expect that to continue.

Got it. And then one of the things that always stands out and sort of every year, it seems like we feel like this can't really continue. But it's the idea that the outboard engine market is again growing faster than the boat market itself. And obviously, for a long time, some of that was just stern drive to outboard. But the bigger driver just seems to be higher attach rate at this point of engines per boat. And then obviously, on top of that, you guys are gaining share and there's a lot of mix and margin benefits. But maybe speak to that, what do you think continues to drive that outboard industry outperformance. And then in the context of your guide, I don't know if you've spoken to this before, but if we're thinking about sort of a flat to up slightly boat industry, how are you guys thinking about sort of the outboard industry. And then you're -- I'm assuming whatever your outboard industry assumption is you think that Mercury is going to do a little bit better than that, but maybe walk us through how to think about those pieces.

Yes. So I think you -- I think you've got a number of the factors in there. The most folks now, almost all recreational boats effectively are powered by outboards. And so we're just continuing to get more volume that way and then also multiple engines. And you don't necessarily see offsets in our financials because some of the offsets that are happening are between our 400, 500, 600-horsepower engines and other people's diesel engines. The reality is there never was a 500 or 600-horsepower outboard alternative. And we didn't even sell that many stern drive gas engines in that power range. Most of the stern drive gas engines that we would sell typically in the 200 to 400-horsepower range, which would be the old OGM kind of -- so we're grabbing share away from some of the traditional propulsion like diesel engines in the bigger boats. In terms of our momentum, we continue to outperform the market for all the reasons that I've previously discussed. I am really excited about some of the new programs that are coming to market over the next couple of years as well. They're not far away which will really extend the whole range upwards and also refresh some of the mid-range products. We can't forget that as we move upwards, we have to make sure that our mid-range product is is completely contemporary and continuing to outperform our competitors. So we're continuing to invest across the product line there. In terms of the overall market, I would say at the moment, everything is supporting our kind of flat to slightly up scenario, and we would expect more mercury share gain and a higher outboard attachment rate and more multiple engine products since premium is growing faster than value. Value product tends to be single engine premium product is typically or frequently multi-engine product. So those are some of the things, I think, supporting. It's not honestly just -- if you think about Mercury's profitability, though, it is not just every engine we sell is what we sell with it like the controls and rigging, and we are just selling more and more sophisticated controls. So you see that part of Mercury's portfolio growing. The more multi engines we sell, the more joysticks, we'll have also capped in all of those things increase kind of share of wallet and attachment rate for sophisticated controls.

The only other thing I'd add, Dave, is given the fact that the larger portion of the boat market now is outboard, as you mentioned, that makes it a larger TAM for repower. So we're seeing more and more repower just because there's more boats to repower over time. So that James also adds to the maybe acceleration of engine, retail versus just pure boats.

The next question is from Xian Siew from BNP Paribas.

Maybe on the slide you kind of mentioned the competitive landscape and other competitors may be having tariffs. I mean maybe could you elaborate a bit more on where you're seeing the competitive landscape in terms of pricing and offering and how that could kind of evolve and support further share gains?

Yes. I would have to say pricing is pretty muted, I would say, in outboards at the moment. Mercury got in place 2% price increase at the beginning of this year, our Japanese competitors are in that range as well. So I think what we're at the moment, seeing is essentially pricing constrained by the market. And nobody really wanting to take price even though there is margin pressure, not for us, but even more, I think, for our Japanese competitors. As the market normalizes over time, we'll see how that goes. But at the moment, we're -- it's important for us to continue to gain share because of everything we've discussed plus the attachment rate for P&A that we get over time. So we try and think about this somewhat in the long term. I think it is clear from some of the commentary and announcements last year that the margin pressures are fairly acute amongst some of our competitors, but they're better to speak to that.

Okay. And then maybe you mentioned the repower market. Just kind of wondering if you could update us a little bit of how big that is for you guys. And I think previously, you talked about maybe 20% of engine sales are kind of repowered, but it seems like maybe it's growing a bit more. Maybe can you talk about repower and where that's going.

Yes. Xian, I can take that. It's still about 15% to 20% of units sold and that it hasn't changed materially. It does differ by jurisdiction. And then where you are. There's some markets certainly outside the U.S., which is very high in repower like Australia and New Zealand. So really no changes there. We're just seeing good volume throughout all the channels.

Yes. What I would say is our share of free power is lower than our share of OEM. And one of the reasons for that is, look, when you repower, there are more repowers typically in the saltwater markets where corrosion and higher performance tends to take more of a toll on the engines. And that saltwater market is a market that we've really been expanding into only over the last, really, 5, 6 years or so. So we would expect to have a higher right to win in that market as our OEM share becomes more reflected in the overall ballpark. And then over the next 3 or 5 years, we would expect share gains in repower as more of our product comes up to be in the repower cycle of kind of 8 to 10 years.

The next question is from Anna Glaessgen from B. Riley Securities.

I guess I'd like to start on the commentary on guidance on the one hand, lower tariffs and flowing through the 1Q beat while also balancing with the conservative macro. I guess, could you provide a little bit more perspective on how that's informing the guidance and potentially if we don't see any disruption of what that could potentially look like for the year?

Maybe I'll start, and then Dave can fill in. So as you know and you know us well, I mean, we are 3 months into the year, and the first quarter is generally the smallest quarter, first and fourth quarter. We had a really nice start to the year, which we're very happy about. And we did get some -- a little bit of tariff goodness, right? So if we look at the -- if I look at the tariff calculation, the IEEPA going away, being replaced by 122 was a good guy. But then the changes to 232 were a slight bad guy. What that did was it didn't really take us outside our initial tariff range for the year, but it put us from the high end of the range where we probably started the year down to the low end of the range. So that Q1 beats a good guy, and tariffs is another small good guy. But then we just look at the cautiousness in the consumer and we look at everything that's going on in the world, and we're entering our core selling season and we feel comfortable where we are with guidance. I think -- if the world stays where it is today and the other shoe doesn't drop, I think we can get to our high end of our range or better, right? I think our point on guidance was really to move up the bottom end and certainly, to take some risk off the table from what we've seen already thus far. But it's obvious that being a little bit cautious given the world activities is prudent at this stage as we really come into the next 2 quarters where we make 55%, 60% of our sales and profit for the year. So we tried not to overthink it, but we gave some of the beat through, which includes some of the goodness on tariffs, and we also have just being thoughtful about what's going on.

Great. And then on 1Q results, thinking through the upside versus initial expectations on EPS. To what extent were potentially lower tariffs in the quarter contributing to that? I just want to understand the upside versus guide? And were there any expenses that shifted into 2Q?

No, no, not on either, no. I think tariffs came in pretty much spot as we expected. And no, we did not push any expenses out of the quarter. It was basically a straight beat based on improved revenues and really nice leverage. And obviously, we have some additional tariff headwinds in Q2 that is informing Q2 guidance. But like Ryan said, we're really -- I think this year, particularly, we'd rather be in a beat and raise cycle then take everything to the bank.

Yes. Dave, you brought -- just to be very clear on Q2, the only real disconnect between our guidance and what the Street was modeling was the tariff impact. And it's rather material still. If you remember, we said on the January call that Q1 was about 2/3 or 60% of our tariff impact for the year and the remainder in Q2, and that holds true. And what it ends up being and there's a lot of mechanics here, balance sheet and LIFO and cap variances that nobody wants to go talk about on an earnings call. But the upshot is that the first half is a bad guy outside the 35% to 45% range. And the second half is actually a good guy that brings us back down into the range. So if you normalize Q2 just for the anticipated tariff impact, your EPS growth would be very similar to what we delivered in Q1. And so that's why the Q2 guided just slightly down from what the Street anticipated. I think they just hadn't caught up to all the tariff movements yet.

The next question is from Gerrick Johnson from Seaport. Next question is from Joe Altobello from Raymond James.

First question I wanted to ask about the industry outlook. You still calling for flat to up for the year. And I'm curious, are you assuming any underlying fundamental improvement over the balance of the year? Or does that just extrapolate current trends and then you're lapping the post liberation day slowdown last spring. Because you did mention you're not anticipating any rate cuts -- any additional rate cuts.

Yes. Joe, I think we certainly are anticipating that at least early Q2 will be up over last year. And that's what we're seeing as we head into the second quarter. We're also seeing, I think, dealers pretty optimistic despite everything that's going on around us. So -- and they have yet to the ground. So we're continuing to get good order patterns. Show sales were good. And then honestly, the back half of the year last year was okay as well. So we just need to get through Q2, particularly early Q2 with a bit of overperformance, I think, to realize flat to up market. And once again, premium continues to outperform value. So there are a couple of -- there's a bit of stratification inside there. But yes, I think the environment is pretty good. If you look at the interest rate environment, loan rates are still kind of 200 basis points down, maybe a bit more than from that peak, about 7.5%. Our dealers still getting flow-through from last year's cuts into the floorplan financing. So that tailwind is definitely present. And we are also seeing that slightly improved discount environment, which is a good indicator of some retail strength.

Well, that was sort of my next question, Dave, which was last year, inventories were a little bit heavier across the industry than they are today. And obviously, there was a lot of spending behind that. So how much of a benefit do you think you'll get this year from the lower promotional spending?

We still think our estimate of about 40 basis points is a good one, and we got about 100 basis point benefit. But even with another 40 basis points, we'll still be a couple of points above historical norms back, if you look back to 2018 or 2019, something like that. Yes, so there's good room to -- we think we'll grab some back this year. That's what we're seeing about 40 basis points -- but we still think that there's some room to run in a more normalized market situation as we move forward. .

The next question is from Gerrick Johnson from Seaport.

I wanted to dive a little bit deeper into trends in your boat group, better sales growth in aluminum. We've seen that in the numbers. And then was kind of okay and then down in saltwater. Saltwater has been down for a number of quarters. Can you talk about what's going on within the Boat Group and the segments there?

Yes. Gerrick. Yes, we're seeing particularly a strength in our Lund brand, which is our premium fresh water brand, which is driving a lot of the increase. We're also seeing really good performance with our Harris pontoon boats, which is also outperforming the market. In both cases, we have strong premium end of aluminum brands with a lot of recent investment in new products. So good outperformance. If you think of the characteristics of the freshwater markets as well, typically pretty dedicated to fishing, not of very high leverage of fuel prices, for example. They don't go a long way. They go to a fishing spot and hang out or on a pontoon something similar. So I think our brands, particularly the premium end of our aluminum brands are performing very well. As you said, Rec Fiberglass is up a bit. What I would say, as you know, we rationalized our value portfolio in Rec Fiberglass. So that is really a product of our Sea Ray brand and to some extent, on the band brand being up both of those are premium brands. And then in saltwater, Whaler, which is our premium saltwater brand, is actually up year-over-year and the bit of softness that we're seeing is more in the value side of our salt water. So those are some of the kind of trends behind the trends, if you like.

Next question is from Molly Baum from Morgan Stanley.

My first question, I just wanted to ask a little bit about some of the operational efficiencies that you saw in the quarter. Where you're seeing the most room in the business to take cost out? And if you've seen any benefit from the footprint rationalization on the value side of the boat business and if not, when can expect to see some of that as well.

Yes. Well, I think the biggest businesses that are experiencing efficiency benefits at the moment from footprint and other sources of Navico Group and Boat group. I'll do Boat group first because you mentioned it earlier. The process of rationalizing those facilities is on track, but they're all actually a headwind to us from a cost basis this year will flow through to, I think, more than 10 million of efficiencies next year. So we would expect to see the majority of that. Then -- but we continue to work on consolidating production lines and introducing more operational efficiencies in various ways in the Boat group, notably a lot of work on on value engineering across all of our product lines, making sure that what we're putting in the boat is really what consumers want and making sure we deliver it as efficiently as possible. Navico Group continues to rationalize footprint and close to smaller facilities within the last, I think, at the end of the fourth quarter or early this year. So it continues to benefit from that and a whole range of other operational efficiencies. We're getting Navico Group now to the point where the footprint is just about right, the investments in new products are coming through strongly with some market share gains as you saw. And so we're getting -- we got that really nice pop in margins, which I think we believe is sustainable and will continue to grow. So yes, I would say Boat Group is proceeding to plan, but we won't get full benefit this year. We'll get some benefit in the second half of the year. Navico Group continues on its journey, but we've done an awful lot of work, including in the recent quarters.

Got it. And if I could just ask one follow-up on boiler plate one. Can you remind us what level of IEEPA tariffs you've actually paid on an annualized basis? And if all of those are eligible for refunds should they get paid out? I know that's not included in guidance, but if you do get a pay out if all of those would qualify.

I think the answer is yes. Yes. So yes. So we have begun the process of applying for IEEPA tariff refunds. It's happening in phases. We've made our first applications. The total value of IEEPA refunds that we now estimate is something like $50 million. And we expect at the moment, we would plan to recognize it as we receive the cash, which we would expect to be some over the balance of this year and some next year. .

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

Just wanted to ask about the value boater. We kind of remove all the macro pressures? What do you think it takes for them to kind of come back to market? Or is it truly just the macro pressures that are keeping them up?

Well, I think what we're trying to do is meet them why they want to be met. And I would differentiate between the fishing-related boating and general purpose boating. And fishing, as you saw, is actually up, aluminum boats are up, certainly on the premium end, but also pretty strong in the value end. If it's part of your lifestyle if it's what you do outside work and other things, then you keep doing it, and they keep being enthusiastic boaters. On the fiberglass side, on the value end, it tends to be more general purpose run about type voting. And that's where we think there is a bit more fungibility between people spending on boating and people spending on other leisure alternatives, and/or being potentially more pressured with discretionary spending. However, that is where our Freedom Boat Club can play a very big role in changing the kind of spending patterns, if you like, for boating. So instead of a large capital outlay, joining fee and then monthly dues and that does give you access to a wide variety of boats. And it's very convenient, which is often what that kind of boater is looking for. They're maybe not as dedicated to the lifestyle as somebody who goes fishing and maybe just looking for a bit more convenience. So we're trying to meet those boaters with alternatives. But we have obviously taken a step to rationalize our product line in that area and invest more in for your boat love.

Okay. And then just really quick, maybe if you could provide an update on kind of how you're thinking about normalized boat demand.

In the short term, our expectations remain kind of flat to slightly up market. I think at the I think we clearly have seen what we believe is an inflection, the market is stabilizing. There are so many external factors, just exogenous factors at the moment that it is very difficult to deconflate everything that's going on. But there appears to be a stabilization versus some of the declines from 2020 through to about 2024. So we're excited about that. We still see this stratification between premium and value. But absent some other major external change, and of course, we've been hoping for that for several years now. We don't see any reason why the market can't return to growth as some of the things that are causing people to be a bit more cautious, hopefully begin to alleviate. So we would anticipate in subsequent years modest regrowth of the market in the low to mid-single-digit range.

And maybe I would just add, supported by 2 other things. One, the used market right now is actually in really good shape. If you've been tracking used product on -- gently used product on most dealer lots is actually relatively light. And that then supports my second point, which is the value calculation for folks trading up and trading in is actually much improved today than it was a couple of years ago. People have more equity in their boats. If you -- if you bought a boat around COVID, you have more equity, you've had more years and your ability to get more for that trade and has improved. And so the dynamics to trade up and trade in has improved, which we believe are getting some folks off the sidelines. So that would continue. And then lastly, I would just offer that even in a very conservative U.S. boat market, we are at half or 60% of replacement value as new boat sales. So we've got a lot of room to run and that is a part of the calculation that we'll discuss on our Investor Day in August.

Next question is from Noah Zatzkin from KeyBanc Capital Markets.

Just on the guidance range, what are kind of the -- at a high level, the kind of differences between the $4 and the $4.50. Is it fair to say like the retail environment expectations are consistent on both ends of the range? And I guess, relatedly, could you remind us what sort of shipment tailwind you expect in kind of the flat to up slightly retail environment this year?

Yes. On the range, I think Ryan really said it earlier. If no other shoe drops, the top end of the range is or even we could do better than that. We're really at the moment trying to trying to just overlay some caution based on some of the external volatility, which would potentially begin to create some additional caution, not necessarily in the U.S. market, but in some of the markets in which we operate around the world. So that is just an overlay of caution, I think, that gets us to the bottom end. Obviously, we can link that with specific revenue assumptions from around the world and margin assumptions, but that's really what it is.

And then just on your specific question on balancing retail and wholesale. If you assume a flat boat market, then wholesale is going to be up mid-single digits on a unit basis. And that's just to match retail and wholesale, given lower wholesale at the start of the year last year. And on the engine side, it's actually a little bit greater than that. It's probably up mid- to high single digits on units. Given that engine pipelines continue to be lower, even certainly in high horsepower as well. I mean we took out -- we've taken out 10% of 175-horsepower and above pipeline each of the last 2 years. So the balancing retail to wholesale there is a good dynamic even in a flat market.

This concludes the question-and-answer session. At this time, we would like to turn the call back over to Dave for some concluding remarks.

Thank you, everyone for your questions. Another very encouraging quarter for us. Solid retail revenue up substantially across all of our businesses, margin expansion, really good earnings leverage and continued really solid free cash flow. We continue to outperform the market, and I think the external environment, I think our -- we're clearly firing on all cylinders now. All of the parts of our businesses are really doing well. So we're very excited about that and excited about both this year and the future in general. Our recurring revenue businesses still are doing great, providing extremely strong earnings and free cash flow. As we have said a couple of times in response to the question, setting guidance in this environment is a little bit trickier even than normal, but we would prefer to be in beaten raise cycle then take everything to the bank right now, given how early we are in the year. And then finally, please reserve a spot at our investor event in August. We're very excited about it. It will be at our Mercury Marine headquarters in Fond de Lac. You will see all the production of those fantastic engines that are leading the market right now. From the leadership team and be able to experience some of our latest products on the water. Thank you very much.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.