Q4 2019 Earnings Call

Ladies and gentlemen, thank you for standing by and welcome to the fourth quarter 2019 full year earnings Conference call. At this time, all participants are names and only mode.

Be advised that todays conference is being recorded.

After the speakers presentation, there will be a question and answer session asking question. During this session you will need to press star one on your telephone to allow for as many questions as possible. We ask that you. Please limit your questions to one if you require any further assistance. Please press star zero I would now like to hand, the conference over just speaker today the directors.

Mr. Schanberg. Thank you. Please go ahead Sir.

Good morning, everyone.

You can access the slides supporting this call at Investor Day, Harley Davidson Dot com click the earnings materials box in the center of the page. Our comments will include forward looking statements that are subject to risks that could cause actual results to be materially different. Those risks include among others matters. We have noted in our latest earnings release and filings with the FCC Harley Davidson disclaims any obligation.

And this call joining me this morning, our president and CEO , Matt Love, It touch and CFO Giannola, Matt Let's get started.

Thank you Shannon and good morning, everybody.

We're pleased that are fourth quarter and full year performance was in line with our expectations. It indicates increased business stability driven by the tremendous efforts of our employees and dealers to inspire riding and navigate the challenges of our dynamic business environment.

During 2019, we significantly advanced or more roads plan.

Vesting building capabilities and achieving milestones keeping us on track to return to significant growth in 2021, we have a lot to be proud of and much to look forward to more rose is an important aspect of the total company transformation journey that has been underway for the better part of a decade. We began this transformation with a focus on Manny.

Factoring that includes our recent multi year manufacturing optimization initiative anchored by the consolidation of our motorcycle Assembly plant in Kansas City into our expanded plant in New York.

The work on this initiative is nearly complete and we expect annual ongoing savings of approximately $70 million in 2021, John will delve into this more later.

We've also transform product development, allowing us to deliver in innovation led approach with a 30% faster time to market dramatically, increasing our capacity and capability to broaden our product portfolio to reach and inspire more people.

This includes electric products motorcycles, and new segments and sizes and even he bicycles our front foot approach to innovation is also helping to strengthen our leadership in the touring and cruiser segment, leading to a historically high 72.4%.

Market share of those segments in the U.S. up 2.5 percentage points over 2018.

We've delivered industry firsts innovations like touring traction control, but advanced ABS and HD connect seamlessly linking rider and motorcycle.

We're also leading the electrification and motorcycles with class leading products developed in conjunction with our new team at our easy Development Center Lifewire labs in Silicon Valley, our innovation and growth pursuits under more roads have also stimulated smart targeted acquisitions like stay sick and new collaborations like Q Jay in China.

All of this transformation investment in effort has allowed us to emerge with more flexible responsive and efficient product processes from design to build processes, we continue to improve and evolve with the changing needs of our customers.

We're now well into the final transformation phase a comprehensive overhaul of our marketing and go to market capabilities to become a customer creation company driving demand and delivering growth by shaping our place in markets around the globe.

We are becoming a company that excels and exists to not only build great bikes, but to build riders.

This focuses focuses us beyond simply what someone is writing to why people ride and how we can use our insights to deliver targeted experiences.

An increase commitment to writing.

We are shifting our mindset and intentionally guiding and nurturing our culture to crave agility with deeper skills and capabilities that are oriented toward customer creation.

We've challenged the structure across the company, adding new talent and organizing resources to swiftly move in these new directions.

We plan to continue new growth pursuits, including new business models targeted acquisitions and new collaborations.

Our more roads milestones for this year include some very heavy lifting in new product delivery will again raised the bar in reach impact and access when we launch our first new middleweight motorcycles, the Bronx Street fighter and our Pan America Adventure touring models.

We also plan to launch a new small displacement motorcycle in China and expand outside of motorcycles with the launch of Harley Davidson E bicycles, our efforts, our amplifying incredible power of our brand and leveraging and expanding our expertise to deliver more for our customers.

Our distribution.

Our distribution model also includes more regional distribution centers more access points and an even stronger global dealer network.

Evidence of the transformation is also appearing in how we measure performance. Our 2020 guidance replaces heavyweight unit shipments with revenue as a primary performance measure revenue better reflects our comprehensive efforts to amplify our brand and foster a customer creation culture, one that builds committed riders.

Revenue growth driven by an expanded product portfolio afresh apparel approach and a pipeline of innovative new services that inspired develop and engage people to ride.

We talked about the shift last quarter when we adjusted our long term international growth objective for measuring percent of motorcycle volume to measuring percent of age DMC revenue.

At that time, we also sharpen and intensified our us growth objective for 2027 challenging ourselves to expand the total pool view us riders by adding more riders and retaining more riders each year.

During 2019, we saw progress in the right direction.

We finished 2019 with 3.1 million Harley Davidson riders in the US 55000, more total riders than in 2018.

During the year 527000 riders joined the Harley Davidson brand.

Thats almost 25000 more than joint Harley Davidson in 2018.

The number of people, who joined Harley Davidson in 2019 demonstrates brand power and are improving capabilities. However, we know more is needed to reach our objective, which reinforces the criticality of our expanded focus in efforts to make writing matter more to more people.

Right or migration insights, we have tell us we need to bring people in build their confidence in capability and keep them riding through the critical first years of they're writing journey, we're testing and developing specific programs and actions right now that nurture new riders and inspire and develop all writers to continue.

Writing with us.

We know what we know we must continue improving and growing the number of joiners and improve retention rates to end 2027, with 4 million total writers in the United States.

And this is the right challenge at the right time.

To drive continued strengthening of our customer creation capabilities as the final chapter of our decade long transformation as a company.

We set out to accomplish a lot in 2019, and we did what we said we would do demonstrating our accelerated efforts to achieve more robust growth and our long term objectives.

To sum it up in 2019, we asserted our leadership in the electrification of motorcycles with the launch of live wire, our first electric motorcycle and iron E for kids, our commitment to leading electrification motorcycles includes broad portfolio development, driven by the talent and capability of our EVP product developed.

And team that expanded significantly in 2019.

We launched high impact new models and delivered advanced technology.

To our class leading model year 2020 motorcycles to make the ride even better we also expanded our Thailand plant to serve the on markets, increasing customer access with more competitive retail prices.

Our global ecommerce and digital capabilities were improved and expanded broadening exposure and access to our products in 2019, 75% of people who purchased hardly products on Amazon were new to Harley Davidson.

Finally, we advanced good to great dealers, making progress toward our customer experience and conversion targets.

The dealers, who participated in our U.S. dealer operations consulting engagements on average saw nearly a 6% increase in motorcycle retail sales over dealers not yet in the program.

Outside the U.S., we began implementing stronger dealer initiatives in the second half of the year, which to help retail sales in developed markets improved markedly finishing up year over year in the second half.

We're on track with the expectations, we outlined at the start of the more roads plan, making the investments that will set us up for the growth targets, we expect to achieve in 2021 and beyond.

Two years in our new products stronger dealers broader access and amplify brand efforts are building and demonstrating killed key skills and capabilities and while competition and challenges our robust we have risen to the task along the way competing on our merits and delivering shareholder value, while we navigate the current environment.

And advance our strategy.

We're driving stability in the business underscored by our ability to mitigate tariff impact shift away from value depleting sales incentives and leverage H. DFS as an important strategic act asset to enable business performed performance.

Harley Davidson is 117 years strong, but as far from the company was before the downturn and it is not the same company was even three years ago. We've transformed nearly every aspect of how we do our work.

And while we have more to do and are more roads quest to firmly established customer creation process. We remain crystal clear that writing is and has always been what it's all about.

We aim to make writing matter more to more people and build committed riders from where we stand today. Our return to growth is not often the distance it's right around the corner and 2020 is our pivotal year I'm looking ahead and I feel good about the hard work that has laid our foundation for the year that we have ahead of us and the.

Journey that we are on for the long term. Thank you for continuing to ride with us and now I'll turn it over to John to discuss the financial results of the quarter in the full year and what we see ahead John Thanks, Matt in the fourth quarter. We were pleased with our earnings and continue tempering and our U.S retail sales declines during the quarter.

And throughout 2019, we made significant progress against our more roads to Harley Davidson plan.

The summary of our Q4 results is on slide 10.

In the fourth quarter motorcycle segment operating loss improved driven by lower year over year, SDMA and the favorable impact of our manufacturing optimization initiative, partially offset by lower shipments higher year over year tariffs and unfavorable mix.

Financial services operating income was down 7%.

Consolidated net income was up versus prior year earnings per share for the quarter was nine cents when excluding restructuring plan costs and the impact of recent you and China tariffs adjusted EPS was 20 cents.

We remain focused and disciplined on inventory management aggressively managing costs generating cash from operations and delivering strong shareholder returns over the long term.

On slide 11 worldwide retail sales of new Harley Davidson motorcycles in the fourth quarter were down 1.4% versus prior year, which represents a significant improvement in the rate of decline versus last year's fourth quarter, which was down 6.7%.

In the US Q4 retail sales were down 3.1% versus prior year, which represents an improvement in the rate of decline over recent quarters, Harley Davidson's fourth quarter retail sales benefited from the year over year tempering of the Industrys retail sales rate of decline and strong HD market share gains.

International retail sales were up 0.5% during the quarter emerging markets retail sales continued to increase while developed market retail sales were down slightly.

After a challenging second quarter, we regained momentum in the third and fourth quarters as we continued to execute our stronger dealer programs invested in amplifying the brand through increased marketing introduced our model year, 2020 bikes and aggressively manage the supply of motorcycles into the dealer network.

We expect continued headwinds in 2020 in the US in developed international markets. We expect to overcome these market challenges by focusing on building committed riders and executing our more roads. The Harley Davidson plan. We believe that we have a strong plan for the future and we are executing with greater urgency.

Now, let's take a lot closer look at the us on slide 12.

During the fourth quarter, Harley Davidson's retail sales were down 3.1% versus prior year behind improving retail.

Sales performance and strong HD market share gains we were pleased to see the continue tempering of our retail sales rate as the fourth quarter represented the lowest lowest rate of decline in the us over the last 12 quarters.

Q4 retail sales for the industry were down 5.6%. This rate of decline was significantly better than 2000, eighteens fourth quarter decline, but was sequentially higher than Q3 of 2019.

On a full year basis, the rate of industry decline has improved significantly from down 8.7% in 2018 to down 4.1% in 2019.

On a full year basis, Harley Davidson's retail sales decline of 5.2% was improved over 20 eighteens decline of 10.2%. We believe that this year over year improvement in the rate of decline was driven by improved industry performance, our focus on stronger dealers and increased marketing investment.

During the quarter Harley Davidson's market share of new bike registrations was 50.4% up 1.0 percentage points. Despite the continued unfavorable mix shift to segments in which we do not currently compete but we'll begin competing in by the end of this year as we execute our more roads plan.

In our segments touring and cruiser, our Q4 market share was very strong up 3.9 percentage points.

We tightly managed that shipments of new bikes into the dealer network in the quarter. This resulted in quarter end use retail inventory decreasing approximately 1500 motorcycles versus prior year. We believe this market discipline is important and maintaining customer and dealer value and will ultimately result in stronger retail sale.

Sales of new motorcycles.

On slide 13 fourth quarter International retail sales were up 0.5% behind growth in our emerging markets offset by slight declines in our developed markets.

Retail sales in emerging markets were up 2.2% during the quarter versus prior year. The sales increases were led by growth in our ASEAN markets and in China strong growth in these markets was partially offset by soft sales in India.

Retail sales in developed markets were down 0.5% during the quarter are developed markets experienced strength in Japan, Southern Europe , and Australia, offset by softness in Canada and Northern Europe .

Our for your market share in Europe was 8.9% down 1.4 percentage points versus prior year.

Our market share was adversely impacted by lapping last year's strong softail results and by lower sales of our street motorcycles as a result of the street recall.

The detail on our more roads plan reinforces our confidence in and commitment to the great potential that the international markets offer to Harley Davidson. Our planned supports the strength of our brand products and distribution to drive sustainable growth in international markets.

On slide 14 wholesale motorcycle shipments in Q4 were down 7.0% and roughly at the midpoint of our guidance overall family mix shifted from Turing to cruiser motorcycles versus last year's fourth quarter.

On Slide 15, Q4 revenue for the motorcycle segment was down 8.5% behind 7.0% decrease in motorcycle shipments.

Average motorcycle revenue production like was down $504, driven by less rich product mix and unfavorable foreign currency exchange, partially offset by higher year over year pricing.

On slide 16 gross margin in Q4 was down as a result of lower shipments a less rich product mix unfavorable currency and higher manufacturing expense.

Q4 product mix was unfavorable by 9.7 million driven by a shift in family mix.

Q4, gross margin was adversely impacted by 8.0 million of unfavorable currency driven by stronger us dollar and lapping 2018 hedge gains.

In Q4 manufacturing expense was unfavorably impacted by lower absorption on lower production and shipments along with increased year over year tariffs largely offset by savings of 15.5 million, resulting from the implementation of our new manufacturing of our manufacturing optimization initiative.

On slide 17 operating margin as a percent of revenue for Q4 improve compared to last year, driven by favorable SDMA and restructuring expenses, partially offset by lower gross margin.

SDMA was significantly lower than prior year as we lap charges related to recalls and as we continue to aggressively manage costs and investing and while investing in increased marketing and are more roads plan.

Restructuring charges totaled 0.7 million in the fourth quarter favorable to prior year by $18.7 million.

Profitability and strong cash flow remain a key focus it is our objective to further leverage and build our capabilities to continue to drive profit cash flow and top Cortile Motor Company ROI C.

Financial services segment fourth quarter operating income shown on slide 18.

Was $58.9 million down 7.0% compared to the prior year.

Net interest income was up 4.2 million due to higher year over year receivables and favorable interest rate yields partially offset by higher interest expense.

The provision for retail motorcycle loan losses was four point onemillion unfavorable in Q4, driven by $2.3 million of higher credit losses and increase in our credit reserves.

Operating expenses were up versus prior year due impart to higher depreciation as a result of our investment in a new loan management system, which was implemented in January 2019.

H. DFS is operational results on slide 19, Q4, retail originations were down 5.9% versus prior year, driven by lower new bike sales HD FSS market share remained very strong at 63.7%.

At the end of the quarter, there was $363.2 million of cash and cash equivalents at each GFS and 1.77 billion of liquidity available through bank credit and conduit facilities. During Q4, H. DFS raised 600 million euros in MTN and paid a dividend of $40 million to Harley.

Davidson Inc.

On slide 20, both on 30 day, plus delinquency and credit loss results were up versus prior year. Despite having moved past startup efficiencies, resulting from the implementation of our new loan management system.

The 30 day delinquency rate for retail motorcycle loans receivable loan receivables on balance sheet at year end was 4.39% or 27 basis points higher than 2018.

The annual retail credit loss rate for receivables on balance sheet was 2.0%.

The 2019 full year loss rate increased 24 basis points, primarily due to the LMS impact in the first three quarters of 2019.

Q4's loss rate was up 10 basis points, driven primarily by two factors first driver relates to our strategic efforts to build riders, which included programs such as first time buyer and dealer paid no money down.

While some of these loans may increase delinquency and credit loss metrics, there prudently underwritten and we expect the increased revenue from these programs to more than offset the higher expected risk.

The second driver of Q4's increased loss rate is softer motorcycle prices at auction.

The remaining Harley Davidson Inc. financial results are summarized on slide 21.

Our year end cash and marketable securities balance was $833.9 million full year operating cash flow of 868.3 million was down versus last year, driven by higher working capital and lower net income.

Regarding liquidity the company has and intends to continue to maintain a minimum of 12 months of projected liquidity needs in cash and or committed credit facilities.

We believe the charts on slide 20 to demonstrate that over time, we're a leader in ROI see at the motor company and return on equity at age DFS and we are a clear leader in our ability to generate and return cash to our shareholders.

One of the five objectives guiding our business strategy and execution through 2027 is to deliver superior return on invested capital as measured by Motor Company ROI see in the top quartile of the S&P 500, and by best in class returns on equity at H. DFS.

On slide 20 through slide 23 illustrates our recent history of returning cash to our shareholders in the fourth quarter of 2019, we paid a dividend of 37 and a half cents per share and repurchase 87.7 million subs I $78.7 million of our stock.

Driving superior value for our stakeholders as a top priority, we have a robust and disciplined process for our investment decisions after investing in our business, we intend to return excess cash to our shareholders in the form of increasing dividends and share repurchases.

Slide 24, as a summary of our multi year manufacturing optimization full year results came in favorable to our expectations with total realize savings of $32.2 million and a new incurred costs of $43.0 million in 2019.

As of the end of the fourth quarter, our investment in manufacturing optimization is largely complete.

Complete we continue to expect annual ongoing savings of 65% to $75 million after 2020.

Moving onto our 2020 full year guidance on slide 25.

In 2020, we expect motorcycle segment revenue to be approximately 4.53 billion to $4.66 billion or down 1% to up 2% versus 2019 as Matt mentioned in 2020, we are now providing revenue guidance instead of our shipment guidance, we're making this change a bit.

As revenue as a much more comprehensive view of our business given the breadth of revenue growth drivers included in our more roads plan that are not captured by motorcycle shipments.

These revenue drivers include such things as small displacement motorcycles electric bicycles electric to wheelers for kids and expanded focus on broadening access to our general merchandise offerings.

To help bridge the changeover to revenue guidance, we expect six so one plus cc and live wire worldwide motorcycle shipments to be down modestly to up slightly in 2020.

We expect Hds us retail sales to be lower year over year behind lower us industry retail sales, but to continue to tempered during the year.

During 2020, we expect worldwide retail sales to be positively impacted by.

Sharpened focus on increasing committed riders and our investment and stronger dealers.

Model year, 20, and model year, 21 motorcycles, including our entry into the dual and sports segments with Pan America, and Bronx models in late 2020 and expansion of the international dealer network.

However, we expect these positive sales impacts to continue to be met by strong headwinds, including a declining us new bike industry.

A relative shift in rider preference towards segments in which we do not currently compete but we'll enter by the end of this year and marketplace crowded with highly competitive promotions incentives and discounts.

We expect to continue aggressively to continue to aggressively manage the supply of retail inventory.

However, we do expect year end worldwide retail inventory to increase moderately behind dealer fill of our new middleweight motorcycles and with the replenishment of our European dealer inventory, which was reduced at the end of 2019 in anticipation of low tier of motorcycles shipping from Thailand.

In 2020 motorcycle segment operating margin as a percent of revenue is expected to be between seven and 8% up from 2019 operating margin of 6.3%.

We expect gross margin to increase in 2020 behind lower year over year, you in China tariffs and strong operational productivity, including approximately 23 million in incremental manufacturing optimization savings.

However, we expect these gains in gross margin to be partially offset by unfavorable motorcycle mix.

During 2020, we expect the impact of recent you interior, China tariffs to be approximately $30 million.

Which is down significantly.

And from 29 teens.

Tariff impacts of $97.9 million. This includes you tariffs of approximately $20 million due to the sell through of high tariff inventory and tariffs on our traits and CEO models, which we will continue to produce in the United States. In addition, we expect to incur approximately 15 million in.

Section 301 tariffs.

While we continue to drive costs out of our SGN a spend we do expect it to be higher in 2020 behind increased investment in our more roads plan as we lap $34 million of 2019 recall benefits, primarily driven by a supplier recall cost recoveries that we do not expect to repeat.

In 2020, our investment in our more roads plan peaks as we finalize product development and plan to launch our new middleweight motorcycles electric bicycles and small displacement motorcycle in China.

Finally, we do not expect any restructuring costs in 2020, which will compare favorably to the $32.4 million of charges incurred in 2019.

At age DFS, we expect modestly higher revenue in 2020 to be largely offset by a higher provision for credit losses and higher interest costs as we roll over.

Low interest rate MTN credit loss are expected to be slightly higher despite lapping last year's higher losses, driven by the implementation of the LMS system, We expect 2020 credit losses to be affected in part by higher loss experience on certain financing programs.

In 2020, we will adopt Cecil the new accounting pronouncement for credit losses. As a result, we expect a one time increase in the allowance for credit losses in the range of $70 million to $110 million with the offset being a reduction to retained earnings net of taxes.

This new accounting standard will not have an impact on the economics or cash flow and cash flows of the H. DFS business. However, we do expect increased earnings volatility as a result of Cecil.

To help our investors better understand each DFS as changes in provision expense, we will begin providing actual year over year credit losses. In addition to changes in reserves.

Capital expenditures in 2020 are expected to be between 215 and $235 million.

We expect our full year effective tax rate to be 24% to 25%.

As we look forward to the first quarter of 2020, we expect motorcycle segment revenue to be between 1.09, and $1.17 billion down to to down 9% versus prior year.

Motorcycle segment operating margin as a percent of revenue is also expected to be down approximately two and a half percentage points.

First quarter gross margin is expected to be flat.

Driven by favorable tariff impacts and increased productivity.

While we expect to be.

Which we expect to be offset by unfavorable mix SGN a is expected to be higher as we lap approximately $28 million of 2019 favorability related to recall recoveries.

To wrap up we faced and overcame a number of challenges in 2019, most notably we have a plan to mitigate the majority of our recent you in China tariff impacts and made significant progress on our more roads plan.

As we look to 2020, we're very encouraged by the momentum that we have gained over the last year on retail sales trends, but also recognize a substantial headwinds that we continue to face.

Looking longer term, we are incredibly excited about our 2020 more roads milestones, which will strengthen our existing business and unlock sustainable growth that will propel us in a new direction and deliver significant value through 2022.

We are committed to driving long term growth for the company and strong returns for our shareholders.

Thank you and now let's take your questions.

Thank you at this time is open conducting our question and answer session.

Order to ask a question. Please press Star then the number one on your telephone keypad to allow for many questions as possible. We ask that you. Please limit your questions to wine.

Your first question comes from the line Craig Kennison with Baird. Your line is open.

Great Thanks, and good morning.

Matt I think you reported that there were 527000 riders that joined the brand and a net gain of 55000. So yes I think last 472000. The question is what is behind the decision by those people to leave and then on a related note if you're growing the total number.

We have riders should we ultimately see growth and PNM is there a strong correlation there.

Yes, Craig Thanks, it's the rate question. So good question and what we had year over year is a very very similar retention rate. So as the new riders joined the people that left also increased as you pointed out for a net increase if you guys thousand so.

What we know from the writer migration database, we have a ton of insights about the the profile of the ex hitters and.

The reasons, why they're leaving and the single biggest.

Driver and where we're focusing our efforts is on that early stage rider those people that have raised their hand took the time invested the money learn how to ride purchased a motorcycle intend to exit the sport within the first three years, because they haven't yet built the confidence necessary to become what we're calling.

In a committed rider that is this site that is the single largest driver of that exit number and it is therefore, the singular focus of our efforts around building rider commitment is how do we really nurture those early stage riders and those programs that I referenced that are underway right now.

Our very specific programatic things that we're doing to address that single biggest driver of those early stage accelerators.

Yes as we.

See the total participation motorcycle increase that were that we're driving we should expect to see a return to growth in PNM and apparel sales as well.

Thank you.

Your next question comes from the Lion share Zak with William Blair. Sir Your line is open.

Hi, Good morning, I guess, you know from the outside it's really hard to gauge the transformation you're going to from the numbers were seen.

I know you highlighted some things in your prepared commentary I guess, if you go back to I Wonder if there was a few years ago, where you unveiled.

The transformation strategy can you help us gaze like where you might be ahead of where you had thought you'd be at this point, where you might be lagging a little bit just so we could kind of.

Level set ahead of well looks like is an expected bigger ramp in 2021.

Yes share and things of this is Matt I am I. Appreciate the question I would say when you look at the net increase of.

Riders in 2018 was.

26000, I believe and lab and last year 29 teams 55000, so we are improving but and ice and I mentioned this in my remarks, we need to accelerate our efforts and that's what's behind this targeted effort that I.

I mentioned in answering Craig's question so.

We set out 10 year objectives and that objective specifically as to increase the number of writers in the us to 4 million. It's at 3.1 million now so clearly we have to pick up the pace to close that gap.

And we have very specific programs in place that we're piloting right now to do that.

And we feel good about it and part of.

What is challenging about this transformation is really challenging the culture of the company in including even in the dealer network when.

For 100, plus years Weve woken up every morning, and told ourselves our job is to make great motorcycles, and we did a great job at that it is quite a different challenge to wake up in the morning, and say, we now need to build riders that requires different skills different capabilities and different mindset in a different cultural attitude and culture. Our culture is very powerful it's very important.

And to shift that culture, we're very we're taking very deliberate steps with talent with organizational structures.

And conscious efforts to just reinforced everybody associated with the brand that our job is beyond just building great bikes, it's really becoming very skilled at building riders and customer creation as I mentioned and it's simply to say that have all the transformations that we've done and they've been very significant and very difficult whether we're talking manufacturing.

Product development. This one is the most significant because we're thinking differently about what we're here to do and that requires all of us to show up differently in the company and even including the dealer network. So we're into it and we have a lot more work to go and you can see that in the numbers, we need to accelerate our pace and Merck, adding things to the mix to do that.

Your next question comes from the line of Tim Conder with Wells Fargo Securities. Tim Your line is open.

Thank you.

Manifest as it would just maybe too can you can you delve into little bit of the specific programs. Maybe that you started in 2019, and then maybe some new ones that you may be doing in 2020 here to help further.

Reduce that churn rate, which again and making the net progress which was good but again there. So thats the key focus it within the first three years of ridership and just a follow up for John on H. DSS.

Just John would you anticipate now given that we're past the anniversary of the system change over those delinquencies to kind of level off here, even though you said two maybe is that the popped up a little in Q4 due to some of the new programs. Thank you gentlemen.

Okay I'll start.

Thanks for the question just I would say broadly there's four target areas that we have based on the writer retention and ridership insights so.

And were and we have pilots of various types in place in Q1 last year, we did some sort of intermediate steps short of riding Academy to give people the opportunity to just have a simple sort a two hour overview, so that they could get in first year get their foot up on the pegs.

And right across the parking line just begin to feel beyond the jumpstart that we've been doing what it's actually like to ride to just nurture them into the whole process of deeper learning. So that is ongoing and we've added to the mix.

Notionally.

Or conceptually any made specific programs around riders recruiting writers so leveraging the passion of existing riders to help build the next generation riders.

Writers recruiting riders writers coaching riders, which is to help those people in those early stage getting the confidence.

And skills and capabilities that they need to fully enjoy riding and in addition to offer.

Riders of various experience levels opportunity to increase there.

Experience on their turf and on their terms not if you will locked into.

Specific programs in the third is.

Writing anywhere anytime and this is addressing some of the barriers that people have that are practical around I don't have a bike or I don't have the gear I don't have some and arrive at I don't know can't find the time to do it. So we're piloting different things to see if we can unlock some of those barriers and the fourth one is really in.

Two solidifying rider commitment and we know from our research that riding epic journeys.

As simple as your first overnight riding tends to really solidify the power of writing as sort of a transformational.

Personal experience and so that riding epic journeys idea is about how do we help people again get deeper into the passion that we all have a for writing so thats. The programmatic themes are concepts. If you will that we have specific in market tests that were underway right now that will begin reporting on.

As we go through the year.

And Tim Your second question. This is John Your second question was as do we expect credit losses on to level off in 2020 in the answer is broadly yes.

In the prepared remarks, we do expect a slight increase in credit losses, but.

Nothing what we saw this year.

But on a slight increase and that will be offset by increased revenue at age DFS.

Okay.

Your next question comes from the line of Adam Jonas market.

Your line is open.

Thanks, everyone at Hey, Matt and I want to first want to say.

Really appreciate and respect how you.

Articulate that the challenges at a really is kind of Don. Thank you know things like E bikes and building riders the cultural change.

For the 117 year old company, it's it's really profound you clearly demonstrate a very high awareness and.

They are trying a bunch of really valiant efforts here I guess.

There were having this conversation now at a time of.

Arguably the greatest us economic expansion on one of the greatest economic expansions and greatest equity Bull markets in history. So the one thing if we were having these problems like in a downturn, but it's just the economy's really humming along right. So I guess, if any of that over the next year, which you describe it as a pivot year I think people on this call agree.

If these efforts don't really show to the fruit that you're hoping here and then there's no guarantee a success what would your management team and your board of directors consider strategic alternatives, including a potential sale of the company to help preserve this incredible franchise and brand in it.

Maximize shareholder value. Thank you.

Yes, Thanks, Adam I would say that the board has always mindful of the maximizing shareholder value in assessing all the decision and obviously the strategy. The company. So we were obviously very as a board very tied into the operations performance and strategy to accompany and we'll continue to evaluate it we.

Have a lot of growth platforms beyond just increasing ridership in the United States and so you'd need to look no further than the investment in the middle weight platform and the potential that that has as we.

Gain access to the significant majority of the heavyweight marketplace outside the United States. So we've been laying the groundwork was.

Dealer distribution points stronger dealer initiatives.

The plant in Thailand.

Laying the groundwork for a very strong.

And potent impact of that middleweight platform investment and so independent of those.

Yes ridership investments we have growth.

Trajectory is that are part of our strategy is another one not just to.

The ease of ridership on an EV product is remarkable.

But also investing in making sure that we are positioned as a leader of the electrification of two wheels because that is clearly.

The direction that automotive products are going over time and they make for phenomenal products. So all these things are part of this strategy I would say that it is important for this organization to challenge ourselves in the way that we are to become a customer creation company here in the United States anything short of that and it may prove that that is a very difficult due.

Durable problem to solve but we're all about it because it's important that we'd be about it that we changed the way we show up as a company and get skilled in ways needed to do that the challenge today is.

We have significant not just people are joining the support of Motorcycling in people are re leaving for different reasons as I alluded to earlier.

But we we it's not we're not talking about competition in the way we used to talk about competition competition is about competition for people scares time.

People scarce funding and commitment we use that word a lot commitment is becoming scarcer in the into decisions people make as far as investing their time and you can see that in all kinds of other industries that require a lot of time to become really embedded in doing something and thats. What our efforts are about me.

I think those efforts are very important skill and capability building for the company anyway, even if this challenge proves more durable than we are setting out to achieve and in the meantime, we have lots of other growth platforms that were.

Investing in as well.

Thank you. Your next question comes from the line of Jamie Katz with Morningstar. James Your line is open.

Hi, good morning.

And our first clarification on the late 2020 launch.

The other guess placement of bike from curious if that will be more.

Heavily weighted to the fourth quarter relative to the third quarter.

Yes look very different depending on when you guys are anticipating launching them and then ill. So if you could clarify what you might have adjusted operating margin.

Just like operating margins for your outlook I know, you've said, 78%, but I think maybe excluding that tariff again that will be credits at 29.

Thanks.

Thanks, Jamie This is John with regards to the launch we I think you're referring to of the middleweight motorcycle that will bring us into the segments that we don't currently compete in particular, the dual segment with Pan America, and the sport segment with our Bronx motorcycle I'm, so that will be coming out towards the end of the year and we would.

Expect some shipments on largely in the United States.

For that and some are a retail sales in the us.

So much on the retail side of.

The European markets at that point, given the time for shipment.

The second question is is on operating margin.

Our guidance is for 7% to 8% and I believe you had mentioned on 9% on given the fact that we have tariffs. So when we look at the overall guidance of eight to eight 7% to 8% that includes on tariff and manufacturing optimization favorability.

And but there's a couple offsets to that and I think thats why you may be it a little bit higher number so let's talk through that for a second.

On tariffs again to be a very clear we had $98 million on embedded in our 2019 actuals and we expect going forward that to be 35 million I believe on the on the prepared remarks, I said 30.

On the piece of paper It said 35, and it is 35, so Jamie that $63 million a year over year favorability as we start to come off the tariffs because of the the actions that we've taken the second pieces of productivity side of it which includes our manufacturing optimization, if we kind of dissect that theres recompete.

Units of that Theres, a restrict restructuring component that won't repeat next year, that's $33 million a favorability theres a temporary inefficiency piece that's embedded in our 2019 performance. That's 10 million that will be favorable next year, because we won't have those inefficiencies as we move forward and then finally.

The reason that we did it is to gain on savings moving forward, we had $32 million of savings in 2019, and we expect an additional 23 million. So those three components, Jamie add up to 66 million. So you add those two together, we do have tailwinds of about $129 million as we move into to.

2020, which is clearly over.

With that represents a little over two and a half percentage points and thats over where our guidance is so I think your question is why is it seven to eight and there are two things that are going to pull us down from.

The 9% that you had mentioned one is unfavorable mix, we saw unfavorable mix in 2019, and largely driven by touring becoming a smaller part of our overall mix and this is something that we've been talking about for for a couple of years now and this is the shift of consumer preference to motorcycles outside of the one.

Is that we make and clearly the driving force between behind our investment in more roads, and we expect that trend to continue into 2020, and so there'll be a headwind on on mix that may not be on in your models. The other piece of it is on SGN a.

So theres two component pieces of SGN, a that are going to be higher one is again lapping.

Call it a onetime or a non repeating item with regards to supplier recoveries.

And recalls at $34 million.

Headwind as we move into 2020 and then the second piece is is that the spending on our more roads and product development on in the five year period that we call are more roads plan on the peak investment period is 2020 and the reason for that is on very straight forward is we're coming out with a lot of new and different product, which requires a lot of.

Engineering investment and product development spending is typically the highest before a product is launched and then the second pieces are more roads investment to launch those products in the go to market spending on to make sure.

Everyone understands those products in the consumer benefits. So we will hit a peak on that spending in ESG and they will be up little bit more than what we're seeing in the investment analysts. Some models. So with those two we do expect operating margin to be between seven and 8% all inclusive.

Your next question comes from the line of Joe Altobello with Raymond James Joe. Your line is open. Thanks, Hey, guys. Good morning.

John I want to go back to a comment you made earlier about.

Hi, Mark nickel prices at offset in the quarter and maybe give us a sense for where that's been trending of late it sounds like the gap between dealing with pricing Hasnt, why and how you're thinking about that heading into 2020.

Thank you Joe.

So when we look at overall pricing, we've typically talked and three levels, what's happening at auction what's happening with.

Pricing services that provide data to consumers and dealers and then finally, what's happening in our dealer network.

So Joe you asked about the first one which is I'm at auction, we've now seen after nine quarters of improvement.

We had a flat quarter end.

Q2, and two quarters of that we've been down slightly in terms of auction prices in Q3 in Q4.

As we tag on to that on the pricing services had about eight quarters of increased pricing on direction, but in the last quarter. We had them split we had one.

Service that was projecting higher prices and on the other lower.

And then the third level of how we look at used bike prices as what's actually transacting in our dealer network.

And with that we've had 10 consecutive quarters of used bike prices on rising which is very good news.

And again this quarter and of in the fourth quarter. They rose on so we got a little bit of mix here, we've got to close eye on what's happening at auction because that typically ripples through to the dealer network, but at this point we are seeing.

Improving used bike prices in our dealer network.

Your next question comes from the line of Gerrick Johnson with BMO capital markets. Sir Your line is open.

Hey, good morning, I want to talk about the departure of Neal Grimmer. He was a highlight at the analyst day, if that had a great presentation wondering who is replacing Tim and are there are changes to the brand development strategy. Thank you.

I think scare couple take that yes.

The same reasons.

For bringing Neil in exist today, and I am actively recruiting for a new brand president and.

The work that was done well he was here and since.

Is it is.

Inherent in the strategy that we have for building committed riders. So we are hard at work on that direction. We've got a great team that is.

Is in place doing that work and in the meantime, I'm, leading that team and making sure that their work is fully integrated as we go to market here in the United States and around the world. So.

Steady as she goes we need leadership.

Of that nature for the work that we need to do to become really.

Skilled at customer creation and as soon as we get that talent will be.

Delighted to get them in front of.

Our investors.

Your next question comes from the line of David Macgregor with Longbow Research David Your line is okay.

Hi, Good morning, Thanks for taking the question I guess, just a question on the international business and you'd indicated that the sales retail sales in the developed markets for down slightly I guess. The question is are you seeing something changed in terms of credit availability from the legacy lenders in those markets that would have contributed to growth headwind there.

Thanks, David This is John we're not seeing any change in credit availability in our developed markets are in international markets remember each DFS plays a very critical role in our.

Access to credit in those markets Theres, certainly well schooled in I'm working with third party providers as you know, we only land and underwrite in Canada and the United States.

But they are working with us and side by sides and we're not seeing any change in credit availability of those developed markets and again with that we're very pleased with what we've seen in the back half of.

This year on our sales in international markets.

The first half of being down about 6.6%, we've seen growth in the back half.

So things David.

This is Paul a question John I guess, you ran a number of promotions in the quarter. These extended warranty promotion a few other things.

How do you feel writers responded to those promotions and what does that tell you about how you guys your promotional activity going forward.

Thanks, David actually we had very little promotions in the fourth quarter. This year, we didnt have a whole lot last year, either the extended warranty program is one of those on but thats been more of a perennial program we've offered that for.

For several years and that just as an opportunity for somebody that comes in in the debt of winner.

To give them a couple of more months of warranty.

So that they don't use that upwelling sitting in their garage or in storage.

So that has not been a core driver.

Of promotional activity, but again.

Consistent over the last several years overall as you know from the from the first quarter of this year, we've been tempering, our promotional activity and incentives and we did do a.

Finance offer in the third quarter.

Much smaller than the one that we had in the third quarter of 2018, but in the fourth quarter of this year, we didnt have any notable promotions or.

Dollars off promotions, we had some in 2018 fourth quarter and we had a private offer out there no real financing offers in the fourth quarter.

So in this is the way we're moving forward, we redirected those funds.

Building in the nameplate buying the brand and have been very pleased with the results that we've seen.

Your next question comes from the line of James Hardiman with Wedbush James Your line is open.

Hi, Good morning, Thanks for fitting me in a lot of my questions were answered, but I wanted to circle back.

John to your Youre.

I think it was jamie's question on margin I think what a detailed you gave was.

It was really help helpful with the bridge, but two questions on that front I guess first.

30.