Q3 2020 Harley-Davidson Inc Earnings Call

[music].

Ladies and gentlemen, thank you for standing by and welcome to the 2023rd quarter Earnings Conference call.

All lines are currently in a listen only mode. After the speakers remarks, there will be a question and answer session appeal.

Like to ask a question at that time, you may do so by pressing star and the number one on your telephone keypad.

As a reminder, this conference is being recorded.

It is now my pleasure to hand, the conference over to director of Investor Relations Ms. Shannon Barnes. Please go ahead.

Good morning, everyone. You can access the slides supporting this call an investor to Harley Davidson Dot com, what the earnings materials box from us and our Lepage. Our comments will include forward looking statements that are subject to risks that could cause actual results to be materially different.

Include among others matters, we have noted in our latest earnings release and filings with the SEC, probably Davidson disclaims any obligation to update information in this call joining.

Joining me this morning are CEO, you'll concise CFO Jean a gutter.

And Chief Commercial Officer, Larry Han will also be joining us for queuing it yocum, let's get started.

Hello, everyone.

With most of the year now behind Us I reflected in how we've driven significant brokers and do live with many changes that we believe are setting a course for winning future.

We've stabilized the business through ongoing COVID-19 impact.

Security across each of the five key elements of the Rewire playbook.

Though initial actions aimed at desirability of starting to drive value for brand products and our customers.

I'm very pleased with our team's achievements in such a short time and I'm encouraged by our early positive signs, we are seeing including posting solid net income in Q3.

We're building a strong foundation that would support the work ahead for the rest of the year, including the ongoing development of the Hotwire strategic plan.

As Koby 19 continues to surge in strange economy, we will not relax our response efforts.

We continue to implement our robust protocol to keep work is safe and effective use what's the why the team continues to work from home.

We are carefully managing cash and our cost management efforts I expect it to deliver 250 million in cash savings this year.

<unk> repurchase remain suspended and today, we announced a Q4 dividend of two cents per share which is in line with Q2 in Q3.

We maintain a strong liquidity position with over $3.5 billion in cash and equivalents at the end of the third quarter and $4.7 billion in liquidity.

Earlier this year I initiated the rewire two overhaul Harley Davidson.

We've already addressed many of the areas identified as needing significant changes.

After six months the team has significantly reduced complexity narrowed focus on only those things that make a difference.

Progress across all five key elements of the rewire playbook, and we've reset our culture of priorities as well as our leadership principles building upon our new mission and vision.

Let me share more details about the progress we've made to date in each of the five key areas of the rewire playbook.

First.

We've reset our operating model across every function for simplicity focus and speed.

The changes have driven significant efficiency, including over $150 million in expected annual ongoing savings beginning in 2021.

We've also changed our leadership team with mostly this being new to their roles and many bringing new perspectives and capabilities from outside the company.

These fresh viewpoints and experience is essential for us to become a high performing organization.

Recent additions to our team include Gina our CFO, who is joining me on the call today.

She's the first woman in this role for Harley Davidson in over 117 year history both.

For the time I would say.

Jack Christian joined Us as new role in his new role as Chief Digital Officer, and we lead our guys and digital transformation.

Tayo Cattell Vice President of marketing reports to me in my role as CMO.

And check Batesville GM of our general merchandise business to name, but a few.

Second we are focused on protecting the value of our products for our customers.

We believe that the powerful network of profitable dealers is essential to delivering the best possible holiday Davidson experience.

We've committed significant resources to improve the networks overall profitability.

We've reduced our global network by 4% to date now working with our dealers to drive consistency in customer experience and to evolve our margin and incentive structure to best align with our common goals around or brand and product.

We sharpened our approach and policies around supply and inventory management to help preserve the value of our bikes for customers, while almost completely eliminating promotions and discounting activities.

We expect to drive significantly higher inventory turns and much lower incentive spend as a result.

And we are already seeing reduced gap in price versus MSRP, which we believe is a critical step towards preserving the long term value of our brand and our motorcycles.

Resetting our global footprint and priorities, it's a third major focus of the rewire.

The U.S. continues to be the most important priority market.

Weve significantly restructured our global business with countries, if it implementation, including a fundamental model change in certain markets, such as India, which we announced in a separate release this morning.

Under our focus participation model, we're exiting about 40 markets were low volume and little profit do not warrant investment.

We are establishing dealer direct or distributor models and about 17 markets and our 36 high potential markets will have a leadership resources and a clearly defined operating framework that we believe will drive desire for growth profitability in the future.

With a complete reset of our regional structure, we now have a less cumbersome and much more efficient setup and have defined a clear a regional strategy in North America EMEA APEC in that time.

We've reset our sub regional structures as noted in our supporting slides.

In this new structure, we're able to reduce to five regional offices to efficiently and effectively support restructured operations.

Both.

We are focused on streamlining our product portfolio in rebuilding our launch practices for maximum impact.

We eliminated models with the lowest profit or potential reducing the complexity of our planned product portfolio by 30%.

We're now pruning further by eliminating optional offerings that customers value to the east.

This critical assessment as part of our new process and it reduces complexity for our dealers and confusion for customers, while helping ensure will be more competitive with our winning products.

We can now focus our resources, where they can make the most impact investing directly in areas that we believe are the highest potential for short mid and long term success like our stronghold core categories and new segments like adventure touring.

We did not hesitate decided to delay or cancel products like street fighter that do not provide the right timing or return profile or advance others that were slated for later market introduction.

In addition, we decided to outsource and restructure our E bicycles business, creating a new venture with minority equity participation.

This approach allows us to have measured participation participation in the bicycle market, while maintaining clear focus on key motorcycle segments.

This reduces complexity at the motor company and loves the new comedy to operate independently with agility without risking brand dilution.

Bicycles will be marketed as serial one powered by Harley Davidson.

We are now committed to what we believe is a vastly improved launch cadence and the approach that benefits our customers.

Dealers and the company.

Our model year will now change over early in Q1, each year, creating product excitement at the time most riders are preparing for the riding season.

While this year's Retiming from August is causing some near term impact further exacerbated by cobot and early year launch will allow product a full season to sell minimizing aged inventory in floor plan costs that are more likely to accumulate during the off season.

Our new marketing plan puts the spotlight back on our brand and mission.

On events that drive to conversion and on investments that build desirability.

We will also properly plan for the investment required to successfully launch and promote our new products.

In the past few months, we've executed impactful marketing campaigns with influences such as Jason or more and Ewan Mcgregor.

The more video featured in our United We were right campaign, Jane generated over 500 million views and our efforts promoting the long way of life why a campaign garnered over 100 million positive media impressions. In addition to an exciting at the TV series with life why at the center of an incredible adventure.

And finally, our rewire playbook has expanded our business focus beyond Microsoft motorcycles.

Our parts and accessories, and general merchandise businesses, which had been underperforming for years and now organized around dedicated leaders and the professional business unit set up that will allow us to capitalize on that potential and new opportunities as we invest in a better product assortment with a clear sales channel strategy.

But general merchandise going forward, we intend to strengthen the linked to our brand heritage reestablish designer quality principles and focus on the most profitable esca use in critical categories.

For parts and accessories, we intend to reestablish our leaders innovators in customization and tightly align or pianist strategy with new motorcycle launches.

We plan to improve pricing and inventories strategy enhanced training and field support and reduce as can use by 15% next year.

Strong foundation created by the Rewire, we'll be starting point for the hotwire are forthcoming five year strategic plan, which I'll talk more about later.

Now I'll hand over to Gina to review our financial results.

Thank you, Ken and Hello, everyone I've been CFO for about one month and I look forward to meeting and talking with you all over the coming weeks.

Overall, we delivered solid financial performance within the quarter as we continue to execute against the Rewire playbook.

Validated net income was up 38.9% in earnings per share were 78 cents or up 41.8% over a year ago.

And motorcycle segment operating income in the quarter was slightly down year over year as shipment declines in restructuring expense were offset by cost reductions across manufacturing and ask Ginny.

Financial services operating income was up 25% driven by a lower provision for credit losses and reduced operating expenses.

As we continue to work through the rewire playback, we incurred restructuring charges of $44 million during the quarter, bringing year to date restructuring charges to $86 million.

We continue to expect restructuring cost to be $169 million.

As you heard from me, Okay. The execution of the rewire its going as planned and we continue to to expect to deliver $115 million had annual ongoing savings beginning in 2021.

[noise] global retail sales of new Harley Davidson motorcycles in Q3 were down 8.1% versus last year.

Yes retail performance was primarily driven by a 10.3% decline in the U.S. due in part to the timing shift of our new model year launch from Q3 to Q1.

Last year, New model year bikes were in the U.S. market in August.

Given this timing shift we were encouraged by solid retail performance through most of the quarter with year over year sales rate declines accelerating in September but in line with our expectations.

We expect to see global sales declines continued throughout Q4, as we adjust to the new model year timing and we continued to experience the impact resulting from lower inventory.

U.S. retail sales also continued to be impacted by new model launch timing and our focus on strong inventory management, our Q3, six or one class C.C.U.S., new bike registration was 41.4% down eight and a half point.

Well the underlying market is strong with U.S. six a one plus cc, new retail sales up 7.5% over last year, which is the first quarter with industry wide growth. Since Q1 of 2016, we believe our share loss is primarily impacted by the planned inventory contraction.

In the international regions EMEA retail sales were up nearly 7% in the quarter driven by strong performance in northern European markets and across Europe, our year to date market share was 7.7% down to one and a half points versus prior year.

Overall Asia Pacific was down 5.5% versus year ago, driven by declines in Japan, and Australia. However, we did see nice growth in the China and South Korean markets.

Across the dealer network, we finished the quarter with worldwide motorcycle inventory down at 34%, we remain committed to our approach to supply and inventory management and we are encouraged to see these actions driving long term fundamental improvements across our business and driving value for our customers.

Our objective is to deliver desirable and profitable volume not simply unit growth.

We do expect that our market share will be volatile over the coming quarters, as we reset model year launch timing and retail inventory levels remain tighter.

As we look to wholesale motorcycle shipments in Q3, we were down 6.2%, primarily driven by declines within the touring family.

Overall revenue was down 9.8% due to the unit volume decline on.

On a year to date basis. The average motorcycle revenue per bike was relatively flat year over year with positive impacts from lower sales incentives and higher pricing offsetting the unfavorable mix shift due to more sportsters and cruisers versus touring bikes.

Moving onto margins total absolute gross margin was down due to unfavorable product mix lower shipments and unfavorable foreign currency exchange. These negative drivers were slightly offset by favorable raw material pricing and lower incremental tariffs within manufacturing they.

Q3 gross margin as a percent of revenue was essentially flat to year ago.

Total Q3 operating income was largely flat versus last year with strong cost management within ESS DNA offsetting the absolute gross margin declines and restructuring expense.

Year to date as you know it was down a $136 million, which is in line with the committed to plan cash savings declared in the face of the COVID-19 pandemic.

The financial services segment operating income in Q3 was $91 million up 25.1% compared to last year net interest income was down $60 million due to higher average outstanding debt as we proactively manage our liquidity in the face of the ongoing pandemic.

The Q3 total provision for credit losses was $26 million favorable to Q3 last year. This includes a 20 million dollar decrease in actual credit losses, as well as a $6 million a decrease in the allowance retail credit losses continued to be down versus last year as a result of lower drilling.

Currency is driven by a high volume of Kobe related loan payment extensions for qualified customers as well as improved use motorcycle values at auction.

The increased volume of extensions, which occurred during the second and into the beginning of the third quarter of this year resulted in fewer past due accounts and lower repossessions in losses.

Improved use motorcycle value stem from a lower number of motorcycles at auction and limited new inventory in dealerships.

The overall change in the allowance for credit losses was favorably impacted by a modest improvement in the company's outlook on economic conditions. During the quarter. However, there continues to be significant future economic uncertainty as COVID-19 continues to restrain the U.S. economy.

We believe the allowance for credit losses appropriately reflects the company's outlook on economic condition and represents estimated lifetime losses in our portfolio at the end of the third quarter.

[noise] financial services retail originations in Q3 were down 4.2% versus last year. However, our market share for new U.S. retail sales remained strong at 67 and a half a percent.

New retail motorcycle originations were down on lower new retail sales inventory availability, partially offset by higher used motorcycle originations as dealers supplemented that the shortfall of new inventory with U.S sales.

At the end of the quarter H. DFS had $2.83 billion of cash and cash equivalents and $1.13 billion of liquidity available through bank credit and conduit facilities for total available liquidity of $3.96 billion cash and cash equivalents remained elevated as we prudently holdco.

Cash in the face of economic uncertainty.

As of Q3, H. DFS debt to equity ratio was 4.6 to one this is well within our debt covenants, which required debt to equity to be no higher than 10 to one.

[noise] H. DFS is retail 30 day, plus delinquency rate was 2.59% down a 116 basis points compared to the third quarter of last year the.

<unk> retail credit loss ratio was also favorable at 1.4% a 43 basis point improvement over the third quarter of last year.

The favorable delinquency performance was primarily driven by a high volume of cobot related retail loan payment due date extensions for qualified customers.

Many of the extended accounts have made at least one payment after the expiration of their extension period, we do expect that the delinquency rate will normalize as customer space longer term financial impacts from Cove at 19.

The remaining Harley Davidson Inc. financial results are summarized on slide 14, we ended the quarter with $3.56 billion in cash and cash equivalents again, maintaining high liquidity as we manage through the pandemic.

Year to date operating cash flow was $1.14 billion and favorable to prior year, driven by lower inventory levels and favorable cash flow from wholesale financing.

As the charts on slide 15 demonstrate we believe that overtime, we are a leader amongst our peers in return on invested capital at the Motor Company and return on equity at H. DFS and we're a demonstrated leader in our ability to generate cash.

Our year to date effective tax rate was 10.8% compared to 24.6% last year. The decrease was primarily due to discrete income tax benefits, which reduced the company's income tax expense expressed as a percent of the pre tax income.

[noise] shareholder returns in Q3 included a quarterly dividend of two cents per share we did not repurchase any of our stock on a discretionary basis during Q3 and do not intend to repurchase stock in Q4, as we continue to preserve cash given the uncertainty of the ongoing pandemic.

As we assess the current environment and the Pandemics impact on the global economy, and our business. It is difficult to reasonably forecast our financial performance and we are not providing guidance at this time.

To wrap up the financials, we saw some positive financial signs in the quarter, including an improved quality of earnings realization I've read the rewire SGN, a reduction and a strong balance sheet as we look to the rest of the year. We continue to expect to be impacted by our model year timing change and our continued focus.

On inventory and supply management.

We are confident the rewire will strengthen our business.

And now I'll turn it back to Yoking, who will share a first look at the hardware.

Thank you Gina.

The reason why is the execution of a playbook that creates a strong foundation for the company, including a new operating model that relaunch the organization for performance reduces costs and sharpened focus on profitable products and markets.

The revised foundation will be the starting point for the hotwire, a forthcoming five year strategic plan to deliver profitable growth and shareholder value based on building and expanding the desirability of Harley Davidson.

The work we are doing to develop our five year strategic plan and the positive initial results. We are seeing reinforces our belief that a strategy grounded in desirability is the right path forward.

As I mentioned last quarter I would like to share first look at the hotwire that is coming into focus now.

Our strategic plan will be guided by a new vision and mission our.

Our vision is to build on our legend and lead our industry through innovation evolution and emotion.

Our mission is more than building machines, we spent for the time this pursuit of adventure freedom for the soul.

Both statements will keep us grounded in a whole authentic brand delivering adventure and freedom and only the way Harley Davidson Ken.

The basis of the Hotwire is Harley Davidson being the most desirable motorcycle brand in the world and the company that defines motorcycle sneaker culture globally.

Desirability it will provide the framework for work and fall a success measures it.

It will be organized around a desirable growth strategy for motorcycles parts and accessories and general merchandise in priority markets.

Desirable customer focus inclusive of distinct products brands and purchase experiences.

Desirable operations that a high performance lean and efficient.

Desirable impact with emphasis on inclusive stakeholders stakeholder management and delivering long term value.

And the desirable workforce that is diverse inclusive and build the wrong top talent rooted in a high performance winning culture.

Let me give you a few details on each of these aspects that are under development as part of the hardware.

Desirable growth will be based on the appropriate balance of our stronghold segments and new segments, where we are best positioned to win.

We'll strive for products that are best in class leveraging the Holly Davidson tradition, and priced to match, our where our value.

We believe there's meaningful headroom in our stronghold motorcycle segment, and we intend to defend and grow our leading positions.

We are aligning our investment strategy to further push innovation in these segments.

Invigorates the objection for customers that love these products and capture the growth spurt by renewed interest in outdoor activities.

We also believe we have room to grow profitably with attractive new products adventure touring for example, we redefined our market participation in a very positive way this.

This segment is highly aligned with our capabilities and our mission.

Beyond these segments. We believe they are further attract different strategic opportunities that support our long term evaluation and evolution.

We are exploring these with focus and rigor recognizing the importance of balancing the potential within our investment framework.

Finally, we believe there's a large untapped opportunity to grow our complimentary business.

Parts and accessories general merchandise and H. DFS by speaking not only to those writers who purchased new bikes, but to the large installed base of existing Harley riders.

We are actively exploring ways to capitalise ways to capitalize on the broader Harley Davidson community of riders a significant asset.

We believe there is immense potential in building a future looking customer journey that combines the best of our dealers capabilities with Harley Davidson enhancements supported by digital.

For that purpose, we're taking a clean slate approach to building future experiences that will contribute to keeping right as engage and also with meaningfully the legal and our mission.

This approach will be designed around a perspective on our customers that is less rooted in demographics and more focused on that attitudes and attuned to where customers along the purchase and ownership journey.

We are assessing transformative moves to reinvent our operations.

As discussed the rewired delivered meaningful efficiencies in how we operate from procurement to inventory management.

The Rewire. However has also brought to light opportunities to continue to transform our end to end supply chain further efficiency and cost effectiveness.

The past few years brought significant dislocation to operations in response to external dynamics, particularly for European markets.

We'll now turn our attention to addressing these impacts to support our future strategy.

Aligned with this our guiding principle is to be customer first by ensuring the right flexibility customization potential price points and service levels for our markets working back through the supply chain in order to deliver on the site.

We will do we will examine every assumption about how we operate and we believe there's significant potential in this effort to power the next level changing cost and efficiency.

Inclusive stakeholder management will be unifying theme for all role in society.

Celebrating unity is at the root of our mission for Harley Davidson, who will walk the talk in every aspect of our business from diversity to environmental responsibility to employee empowerment.

We think about inclusive stakeholder management as increased unity of purpose built.

United We will ride.

Last but certainly not least just as critical as the business overhaul to reignite, the company's soul and spirit, our culture must also evolve.

We're moving fast, making swift changes and all of us together, including our dealers need to up all game substantially to compete successfully in the coming years.

We are calling our cultural journey Holly Davidson number one representative power recognizable number one logo that was introduced in 1969 to celebrate the National Championship.

Harley Davidson racing teams have historically used the number one on the winning motorcycles.

Number one is uniquely ours.

It's an iconic symbol of winning and the hard work in high performance It takes to get there.

We are redefining our culture, our organizational principles employee engagement and expectations to focus on the strength and spirit of our hundred 17 year legacy.

Desirability define success.

The Hotwire, we'll talk a growth that is focused and profitable across the businesses.

Our targets will be achievable, and we will not pursue growth merrily for growth sake.

Our brand is powerful and recognized globally.

Find incredible heritage an iconic products.

We have a new foundation to execute a new strategy that will solidify our place as the most desirable motorcycle brand in the world.

We are committed to this multi year journey.

Now we'll open for questions.

In order to ask a question. Please press star one on your telephone keypad to be placed into the queue.

We ask that you limit yourself to one question.

You have any further questions. Please press star one again to reenter the queue, we'll pause for just a moment.

Well first question will come from the line of James Hardiman with Wedbush Securities.

Hi, good morning, Thanks for taking my call.

Two part question [laughter], the way I'm going to get around that but oh.

Maybe talk a little bit about this new distributor model help us understand.

Obviously, I think you've identified some of these markets or maybe not paying for the home run, but you once thought that they would be.

But it doesn't sound like you're necessarily giving anything up on the topline by going through a distributor model.

Yes, what is the impact on margin ultimately are you sort of giving back whatever cost savings you might be getting a.

From exiting those markets for manufacturing perspective.

Given that there is some kind of revenues to your to your partners and those markets. It was I understand that a little bit better and then I guess more broadly do.

Do you think the long term top line potential after you're done with with a lot of the cost cuts that are that are underway here is that necessarily less than it. Once was is it similar to what it once was or is it even maybe greater than it once was thank you.

So James this is Larry let me take your first part of your question.

Really we don't see a whole lot of impact to margin on the change to distributor models. I mean these are not if you look at overall number of units compared to total you know motorcycle shipments or a retail sales for the company are not that large.

And a lot of cases. These are you know in smaller markets. These are you know single dealer markets, maybe to dealer market. So so once again not.

Not a huge impact from that.

So overall, we think that the.

The overall impact probably is not that great.

[laughter].

To your second question James well it depends what you want to compare to what when you say what is the long term topline potentially less than it once was I would need to know what the ones was was so I do that but the reality is if it were not given you know topline guidance at this point and I think the refocus that we've.

We've done with the revised strategy you know, we'll obviously a you know it also impact our hotwire strategy. The key is not the topline growth.

Growth. The key is that we want to grow Desirably and profitably. So this as I said, a you know it's really important to bear that in mind, we don't want to grow for the sake of growing we want to grow profitably and if we can grow profitably wells will will will take that at the time that happens having said that we do see a lot of potential I mentioned.

Parts and accessories general merchandise.

HD, if as and we do see of course also potential in our motorcycle business, but focus is key you know trying to do everything at once and making sure that what you launch a in terms of existing categories and new categories is is manageable with a powerful go to market process. So we believe growth comes through focus as well.

And the reason why it has reset our operating model and it was not a as I mentioned, a you know just a or an initiative to reduce costs, but to really make us.

And efficient effective and a high performance organization. So it was done very carefully.

But you know without compromise relief setting us up for a faster.

Foster more focused less complex organization.

Our next question will come from the line of Garrett Johnson with BMO capital markets.

Hey, good morning.

So when we walk into some dealerships that kind of a quick ghost towns and.

Yeah, it'll tell us they're not getting the bikes until February. So clearly you shipped about 25000 bikes in the U.S. So how are you allocating those motorcycles to dealership base.

So so garik.

We are looking at a dealer supply right and we are measuring dealer supply and we are filling based on you know days forward sales for dealer. So so you know the dealers who are call. It short on supply relative to our projected you know.

Forward sales over the next couple of months.

Get supplied first and then and then we we continue to work down the list like that.

I would say at the end of the quarter.

We were pretty.

Pretty close to a couple of months forward sales at our dealer show. So we actually are.

FFELP decent about our strategy and that we are probably a little like you know at that point as we went through the quarter.

Sure.

Our next question will come from the line of brand around he with Northcoast research.

Good morning, Congrats on the strong earnings performance I guess my question was you know kinda also on the dealer base, because you kind of break out the impact of dealers, you know, possibly going away or being eliminated as you create a stronger and more profitable base and I guess the break that out from a shipment in retail first.

Because if you can.

So so we probably won't.

You have that kind of detail on this what I, what I will say is that you know we have closed about 61 full line dealerships I think as it was reported in.

The comments, you know about 4% of our of our total.

And that.

No those those are.

Those are call it closures combined with our managing inventory.

And on a much tighter in line with our supply and demand are driving some real positive impacts for our dealer network, we're seeing improved pricing on a news motorcycles were seeing improved.

[music] motorcycle selling right around MSRP were seen at a tightening of the gap between pricing for new and used motorcycles and I would say that despite lower sales we have seen improvement.

Improvement in dealer profits and in fact, many dealers, having very strong profits throughout the that the third quarter. So dealers are certainly seeing the benefit of all these actions.

Great to hear thanks.

Our next question will come from the line of Greg Badishkanian with Wolfe Research.

Hey, guys. Good morning, its actually Fred Wightman on for Greg you in your prepared remarks mentioned plans to defend and grow your leading position now when you were talking about hard wire, but the U.S. share was down over 800 basis points again on the quarter. So I understand that that's going to be volatile, but can you sort of help us understand why.

What's your expectations for that metric as we move into the beginning part of next year and the model year reset takes place.

Yes, Thank you Fred Lucas.

Look we've always said that market share right now it doesn't really matter simply because we have to focus not on volume but on desirability.

And we will not be value our brand by Oversupplying, the market, resulting in price promotion and discounting activities, which have seized this quarter and also in the previous quarter and we will not pursue volume growth at the expense of the right fundamentals for business and that is very much the case for this year.

So you know we are all I can say right. Now is we are focused on taking the needed actions to ensure.

That we are the most is algo motorcycle brand in the world and as part of that we are managing inventory in line and or rather a little short of demand.

And as Larry just said, we these actions are driving the intended results increased demand and increased pricing for used motorcycle dealers are selling new bike it at or very close to MSRP higher dealer profitability and I think that's what really columns and while some of our competitors are rather price aggressive.

It's not something that we want to buy into and hence there was quite a you know inventory glut in the system that we manage to now work through the system due to COVID-19, and and and our restricted to inventory policy and that is showing the right results what that will lead in terms of.

Market share going forward, we would comment on once the half life.

Strategy is a is launch but as we said this is not just about market share. This is about a desirable market share and for that we had to take the actions. We have we had to take that will be done by the end of the year and from there. We can rebuild a and certainly our goal is to expand market share desirably in the future as well as part of the hardware.

Strategy profitably, though.

Our next question will come from the line of Shawn Collins with Citigroup.

Yes, Craig Thank you, Hi, Gina Shannon and good morning.

Like my question is on manufacturing in the U.S. and if you are possibly seeing any supply chain disruptions or complexities I think Polaris slated for an interim that will supply chain disruption. This morning addicts snowmobile segment. So if you much beyond that.

But that's subject I appreciate it thank you.

Yes, Sean are you know.

Supply chain disruptions, we don't see right now obviously, we had disruption when our factors were closed and as part of the restart or has it become much more complex absolutely and the but I think the team has done an extraordinary job you know to navigate through.

Go with my team, we have the right to safety security protocols in place you know to deal with COVID-19, and ER, we haven't seen any substantial shutdown since so and supply chain. A you know there's always one or the other smaller disruption, but nothing significant at this point in time.

Okay. That's great. That's helpful. Thanks, Thank you very much for the color and insight.

Our next question will come from the line of Adam Jonas with Morgan Stanley.

Hey, our fan and congrats Gina welcome to the team.

I Hope you don't think that stock price up 15% every earnings result, as normal it's nice it's enormous this isn't I wouldn't I wouldn't extrapolate [laughter].

All the Jena effect, Okay. Just one question our yard in your closing remarks you.

You kind of piqued my interest when you talked about beyond after your comments on adventure touring you said beyond these segments.

I'll have to check the transcript, but you said, we want to continue to look at attractive and strategic segments, and we're exploring them where the rigor.

Okay, and I I think I mean, I'm, probably crazy, but I keep I can't help but think about three wheel and four wheel on and off road adventure vehicles both.

And I see power trains and also BV powertrain could this categorically be included in one of those potentially unexploited opportunities for Harley Davidson.

Well, thanks, Adam I would say it cannot.

Be categorically exclude it [laughter]. So you know look at this point we are looking at every opportunity that is the key thing is you know focusing on the things that we think have the most potential for success.

And that means clear focus on our core segments expansion and that's the majority of our business, but that doesn't exclude certainly in three weeks simply because our truck business has been quite successful, we see potentially in that and I'm not going to rule out for three years, but you shouldn't take that as an indicator.

None that we will get into four years, but you know once you defend or why did you develop a new strategy I think everything has to be at the table and there's certainly no categories that we don't think could potentially be an opportunity either into short mid or long term I know, that's a little cryptic or no I understand I, probably <unk> I will keep it at that we are categorically not excluded.

In anything but that doesn't mean that we will certainly not jump into everything that offers an opportunity we want to stay very focused and any adventure. We are taking it will need to be well very thought through and and the chances of success or have to be very high and we need to see a competitive advantage.

Wantage that we bring to that new category that we might enter a with the Harley Davidson brand and our product.

The next question will come from Marina Felicia Hendrix with Barclays.

Hi, good morning. Thank you so much yeah I mean.

And as you look into the future maybe not so far at this point in the near term.

What do you think is the right normalized run rate for worldwide shipments over time do you see the company getting back to 200000 units a year and then also when do you expect the motor company to get back to regular introduction rate of new models.

Well Rick regular introduction of new models will start to next year. What has just changed is that the the change or more of model year to model years no longer happening in August it's all happening at the beginning of the new years. So that's a one time effect from here on we will continue to introduce new models.

Throughout the year, but with the model year changeover actually happening in the calendar year the.

The trend or the change over you know supposed to happen rather than the year before.

Look we are not commenting on run rate and units a normalized I mean, and I don't want to really give any guidance for next year. At this point in time I think we've done what we need to do in terms of making sure that the base of our business is desirable and that is a good platform or to grow and to.

But I I need to leave it at that today.

Let me just to clarify on the first part I I, probably should have been more clear on it in terms of you know more as a I guess the cadence can you get she's actually I know, there's a lot of years changing just in terms of the number of new models, a year I mean without any kind of more of a gradual ramp or well, it's certainly you're right away.

The carry over bikes and and the majority of new bikes will be launched in the first quarter, but we will have launches are also a in one or the other quarter. Following the new model introductions. So not every new product will come in the first quarter or future years, we don't I don't think.

That makes much sense or you want to make sure that there's enough new product out there in the following quarters, a junior to create desirability end demand. So the majority, yes first quarter, but they often they will be either new categories that we or segments that were venturing into or new you new products in particular in our cost.

Thanks.

Our next question will come from the line of Jamie Katz with Morningstar.

Hi, Good morning can you [laughter] delineate what the 39 markets that youre exiting represent as a percentage of sales and profits. So we can get an idea of what the impact of that might be and then just a clarification I think the language that you used for on average.

Selling prices said they were flat year over year, but I think maybe that's stripped out the mix shift that so if I did my math right I think actually the Asps were down can you just confirm that thanks.

So so Jamie I can take the first part of your question.

The impact on sales and profits of the of those markets. We are exiting is minimal.

Probably a.

Less than 1% of worldwide unit sales.

And profit like I say profit really not particularly meaningful.

Yeah, and average selling price hasn't really changed that much I mean, and as Larry mentioned earlier. Our MSRP is you know has actually going not going up so there's not a significant shift within the models are.

And within the segments and but obviously there is some impact.

Due to the decline in the touring segment for the overall, you know or segments or holding off holding up well. According to our plans for for this year.

Thank you.

The next question will come from the line of Craig Kennison with Baird.

Hey, guys. Good morning, Thanks for taking my question and GGR. Congratulations most of my questions have been asked so I'll shift to a bigger picture question, California has proposed a ban on gas cars by 2035.

Obviously motorcycles are not cars, but it's not hard to connect the dots. So to what extent are you preparing Harley Davidson for any similar action against gas powered motorcycles.

Yeah. That's that's a good question and the and that's why we are we have launched a life why a and a you know we we believe are electric is needs to play an important role in the future of Harley Davidson a it's still in the merchant category.

So you know sales volume and volumes are relative but from what I can see through all this we actually believe that life why is the best selling electric on highway or do we'll electric motorcycle in the U.S. actually selling more than doubled the next highest electric motorcycles.

So that means you know we are leading a leading the way we have an extraordinary product and that is the starting point to continue to expand in the electric motorcycle segment. So we believe it is important.

We have a an important role to play we are leading in the segment Khalid Lifeway as just being elected as the best electric motorcycle in 2020 by motorcycle news or it's an extraordinary product and its the starting point or two more so we are fully committed to electric not just because of Kelly.

On the other because we believe it can be an important segment that must be is an important segment in the long term future of the company and its also attracting new riders and new customers to the brand that might not have considered Harley Davidson before.

Thank you.

The next question comes from the line of Joe Altobello with Raymond James.

Hey, Thanks, good morning, everybody.

So just a quick question on assuming obviously down nearly so yes.

Okay.

Roughly double that you escape how much of that reduction is sustainable and its $200 million a quarter.

Roughly a good run rate as you something about 2021, I'm, assuming some cost savings.

Thank you Miss your co related I'm, probably come back next year, but then you've got restructured students and up and up next year as well. So just trying to get a sense of what the <unk> what.

Well, what a good run rate for US you know its going forward. Thanks.

So coming back to ask you name what we've committed to you from a restructuring standpoint, obviously, we said that theres, a 169 million of restructuring costs and that equates to $115 million or the ongoing ongoing savings and that estimate remains unchanged. So I wouldn't take.

This quarter as the runway that I would move throughout because there's a combination of those kind of the near term actions that we took to kind of reserve and preserve cash in the quarter I would anchor to that $115 million of annual ongoing savings.

Okay. That's helpful. Thank you.

Yeah.

The next question comes from the line of David Macgregor with Longbow Research.

Yes, good morning, everyone.

Certainly the long term plan is very exciting here, but just focusing on the near term you you'd mentioned earlier that a you know market share doesn't matter right now, but I would like to see if you could explore first at 840 basis point drop in the market share and I realize it's probably good measure that's the planned inventory retractions, but could you separate okay.

First just the impact of the the inventory Retractions from just what the competitive dynamic was in the quarter. Thank you.

So David.

David I would say a couple of things. One is we you know there there were some growth in the market in certain parts of the market, where we don't compete or this quarter. So so that certainly had an impact on the on the market share.

The you know the the not having.

The new model year launch.

Certainly had an impact as well normally we see a little bit of a lift when you know when when in September after those new bikes are introduced and then and then combine with that I think you know the impact as we talked about in the prepared comments about tighter inventory management, certainly had had an impact as well so again.

Combination really of those three things I think drove the market share, but as we've said the you know the trade off has been stronger pricing of new and used motorcycles better profitability for our dealers higher margins for our dealers. So so I think we are.

Really executing our you know our strategy of building desirability for Harley Davidson motorcycles in the in the brand.

And to add to what Larry said no promotional activities, we have no promotion a significant promotion in the market in comparison to some of our competitors that has been highly promotional and continue to be highly promotional.

The next question is a follow up question from Gary Johnson with BMO capital market.

Yes.

Hey, Sorry go ahead your line is that right.

And then if I could get back. So this is a question for Juno just in general surprises, where you're most excited about how are your town scrupulous benefit relative.

[noise] I surprises in China, I guess I'm overly I'm Super excited to be here I'm Super excited to be part of this amazing transformation.

All of the kind of the actions that you can laid out and the actions that the leadership there are taking very inspired to be part of the journey that they're on so I don't know that I have any any real surprises, but I.

I guess pleasant surprise that there is that there is an organization that has lined up behind this mission and ready to go which is great.

Thank you.

We have a follow up question from Adam Jonas with Morgan Stanley.

And forgive me if I if I missed this but can can you remind us when we should expect to hear the five year plan. The hardware plan next year.

Sure that's going to be with the announcement of the fourth quarter results in February.

Okay. So it's a so the simultaneous not a separate it's it's just part of the normal earnings presentation, that's not a separate capital markets day as such no. That's correct great. Thanks, you I appreciate it.

With that we are showing up actually we just received a follow up from James Hardiman with Wedbush Securities.

Hey, Thanks for taking my follow up here so.

Lastly September was the month, where the the modeled year comparison with tough it's safe to say that if I think about sort.

For them and a 10% decline domestically and and 8% globally that that was probably worse in September just trying to think about how I should frame for fourth quarter.

If I think about sort of retail, which you know were still going to have that difficult comparison from a from a model year perspective and then.

I look to next year I'm not going to ask you anything about guidance, but just maybe help us understand if there there's going to be significant fallout from these markets you're exiting it it doesn't sound like they represented much in terms of overall shipments are overall retail, but I don't know is there going to be a material impact from exiting market as I think.

About.

You know shipments in 2021.

So so James on the I'll, just what I'll talk about a third quarter kind of the sequencing of the.

You know that the sales as we went through the quarter. If you will you know sales were pretty solid in the month of July.

And then and then really through the first three weeks of August you know then would you know then then you start lapping those last five weeks of the quarter.

Or where you are lapping you know does any model your introduction and that's where we really saw I think some some decline, particularly in the U.S. market, which tends to have a stronger sale of those new.

Products and then as I said earlier the impact of these markets were exiting a lot of small markets lot of kind of one two dealer markets.

So so not a significant fall off next year that we expect on on a market exits I mean, there will be some but but not a not a meaningful.

Perfect. Thank you.

And with that we show no further audio questions I will now hand, the conference back for closing remarks.

All right. Thanks for joining us today, everyone. We appreciate your interest in Harley Davidson have a fantastic that buyback.

This does conclude today's conference call. We thank you for your participation and ask that you. Please disconnect your lines.

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Ladies and gentlemen, thank you for standing by and welcome to the 2023rd quarter Earnings Conference call.

All lines are currently in a lift and only mode.

The speakers remarks, there will be a question and answer session appeal.

Like to ask a question at that time, you may do so by pressing star and the number one on your telephone keypad.

As a reminder, this conference is being recorded.

It is now my pleasure to hand, the conference over to director of Investor Relations Shannon Barnes. Please go ahead.

Good morning, everyone. You can access the slides supporting this call at Investor Day, Harley Davidson Dotcom, what 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 probably.

Davidson disclaims any obligations to update information in this call joining.

Joining me. This morning are C O York insights CFO, Jean I got her.

And Chief Commercial officer, Larry will also be joining us for queuing it yocum, let's get started.

Hello, everyone.

Most of the year now behind Us I reflect on how we've driven significant progress and deliberate many changes that we believe are setting a course for winning future.

We stabilized or besides through ongoing COVID-19 impact.

We executed across each of the five key elements of the rewire playbook and our initial actions aimed at desirability of starting to drive value for Brent what products and our customers.

I'm very pleased with our team's achievements in such a short time and I'm encouraged by early positive signs, we are seeing including posting solid net income in Q3.

We're building a strong foundation that would support the work ahead for the rest of the year, including the ongoing development of the Hotwire strategic plan.

As Koby 19 continues to surge and strain the economy, we will not relax our response efforts we.

We continue to implement our robust protocol to keep working safe in our factories, what's the why the team continues to work from home.

We are carefully managing cash and our cost management efforts I expected to deliver 250 million in cash savings this year.

<unk> repurchase remain suspended them today, we announced the Q4 dividend of two cents per share which is in line with Q2 in Q3.

We maintain a strong liquidity position with over $3.5 billion in cash and equivalents at the end of the third quarter and $4.7 billion in liquidity.

Earlier this year I initiated the rewire two overhaul Harley Davidson.

We've already addressed many of the areas identified as needing significant changes.

After six months the team has significantly reduced complexity.

Narrowed focus on only those things that make a difference.

Made progress across all five key elements of the rewire playbook, and we reset our culture of priorities as well as our leadership principles building upon our new mission and vision.

Let me share more details about the progress we've made to date in each of the five key areas of the rewire playbook.

First we.

We've reset our operating model across every function for simplicity focus and speed.

The changes have driven significant efficiency, including over $150 million in expected annual ongoing savings beginning in 2021.

We've also changed our leadership team with mostly this being new to their roles and many bringing new perspectives and capabilities from outside the company.

These fresh viewpoints and experiences I essential foster become a high performing organization.

Recent additions to our team include Gina Oh, CFO, who is joining me on the call today she.

She's the first woman in this role for Harley Davidson, our hundred 17 year history bottom.

For the time I would say.

Jack question joined Us as new role in his new role as Chief Digital Officer, and we lead our guys in digital transformation.

David could tell it vice president of marketing reports to me and my role to see them all.

Batesville G.M. of all general merchandise business to name, but a few.

Second we are focused on protecting the value of all products for our customers.

We believe that a powerful network of profitability that is essential to delivering the best possible Harley Davidson experience.

We've committed significant resources to improve the networks overall profitability.

We've reduced our global network by 4% to date now working with our dealers to drive consistency in customer experience and to evolve our margin and incentive structure to best align with our common goals, the roundup brand and product.

We sharpened our approach and policies around supply and inventory management to help preserve the value of our bikes for customers while.

Almost completely eliminating promotions and discounting activity.

We expect to drive significantly higher inventory turns and much lower incentive spend as a result.

And we are already seeing a reduced gap in price versus MSRP, which we believe is a critical step two with preserving the long term valuable brand and our motorcycles.

Resetting our global footprint and priorities, it's a third major focus of the rewire.

The U.S. continues to be the most important priority market.

Weve significantly restructured our global business with country, typically implementation, including a fundamental model change in certain markets, such as India, which we announced in a separate release this morning.

And I'll focus participation model, we're exiting about 40 markets were low volume and little profit do not warrant investment.

We are establishing d. that direct or distribute them once and about 17 markets and our 36 high potential markets will have a leadership resources and it clearly defined operating framework that we believe will drive desire for growth.

For the ability in the future.

With a complete reset of all a regional structure, we now have a less cumbersome and much more efficient set up and have defined a clear a regional strategy in North America.

Yeah APEC in that time.

We've reset our sub regional structures as noted in our supporting slides.

This new structure, we're able to reduce to five regional offices to efficiently and effectively support restructured operations.

Fourth we.

We are focused on streamlining our product portfolio in rebuilding our launch practices for maximum impact.

We eliminated models with the lowest profit potential reducing the complexity of all planned product portfolio by 30%.

We're now pruning further by eliminating optional offerings that customers value the beast.

This critical assessment as part of our new process and it reduces complexity for our dealers and confusion for customers, while helping ensure would be more competitive with our winning products.

We can now focus our resources, where they can make the most impact.

Vesting directly in areas that we believe are the high potential for short mid and long term success.

Our strong core categories and new segments like adventure touring.

We do not hesitate did to delay or cancel products like street fighter that do not provide the right timing or return profile for advanced others that were slated for late to market introduction.

In addition, we decided to outsource and restructure our E bicycles business, creating a new venture with minority equity participation.

This approach allows us to have measured participation participation in the bicycle market, while maintaining clear focus on key motorcycle segment.

This reduces complexity at the motor company and loves the new common did you operate independently with agility without risking brand dilution.

Bicycles will be marketed as serial one powered by Harley Davidson.

But now committed to what we believe is a vastly improved launch cadence and the approach that benefits our customers he lives and the company.

Well most of the year will now change overall early in Q1, each year, creating product excitement at the time most riders are preparing for the riding season.

By this he is retiring from August is causing some near term impact further exacerbated by cobot and early launch with a lot of products. The flu season to sell minimizing aged inventory in floor plan costs that are more likely to accumulate during the off season.

Our new marketing plan puts the spotlight back on our brand and mission.

On the events that drive to conversion and on investments that bit of desirability.

We would also properly plan for the investment required to successfully launch and promote our new products.

The past few months, we've executed impactful marketing campaigns with influences such as Jason will mourn Ewan Mcgregor.

The more video feature in our United We were right campaign, Jane generated over 500 million views and our efforts promoting the long way off like why a campaign garnered over 100 million positive media impressions. In addition to an exciting at the TV series with life why at the center of an incredible adventure.

And finally, our rewire playbook has expanded our business focus be on Microsoft motorcycles.

Oh parts and accessories, and general merchandise businesses, which had been underperforming for years now.

Now organized around dedicated needed and the professional business unit set up that would allow us to capitalize on that potential and new opportunities.

As we invest in a better product assortment with a clear saves channel strategy.

But general merchandise going forward, we intend to strengthen the link to our brand heritage reestablish design at quality principles and focus on the most profitable let's get using critical categories.

Well parts and accessories, we intend to reestablish our lead as innovators in customization and tightly aligned or p. in a strategy with new motorcycle launches.

We plan to improve pricing and inventories strategy enhanced training and field support and reduce as could use by 15% next year.

Strong foundation created by the Rewire, we'll be starting point for the hotwire or forthcoming five year strategic plan, which I'll talk more about later.

Now I'll hand over to Gino to review our financial results.

Thank you your gun and Hello, everyone I've been CFO for about one month and I look forward to meeting and talking with you all over the coming weeks.

Overall, we delivered solid financial performance within the quarter as we continue to execute against the Rewire playbook.

Validated net income was up 38.9% in earnings per share was 78 cents or up 41.8% over a year ago.

And motorcycle segment operating income in the quarter was slightly down year over year as shipment declines in restructuring expense were offset by cost reductions across manufacturing and ask Ginny.

Financial services operating income was up 25% driven by a lower provision for credit losses and reduced operating expenses.

As we continue to work through the Rewire playbook, we incurred restructuring charges of $44 million during the quarter, bringing year to date restructuring charges to $86 million.

We continue to expect restructuring cost to be $169 million.

As you heard from yolk in the execution of the rewire its going as planned and we continue to expect to deliver $115 million at annual ongoing savings beginning in 2021.

Global retail sales of new Harley Davidson motorcycles in Q3 were down 8.1% versus last year.

This retail performance was primarily driven by a 10.3% decline in the U.S. due in part to the timing shift of our new model year launch from Q3 to Q1.

Last year, New model your bikes were in the U.S. market in August.

Given this timing shift we were encouraged by solid retail performance through most of the quarter with year over year sales rate declines accelerating in September but in line with our expectations.

We expect to see global sales declines continue throughout Q4, as we adjust to the new model year timing and we continued to experience the impact resulting from lower inventory.

U.S. retail sales also continued to be impacted by new model launch timing and our focus on strong inventory management, our Q3, six or one class C. C. U.S., new bike registration was 41.4% down eight and a half point.

Well the underlying market is strong with U.S. fixed a one plus cc, new retail sales up 7.5% over last year, which is the first quarter with industry wide growth. Since Q1 of 2016, we believe our share loss is primarily impacted by the planned inventory contraction.

In the international region EMEA retail sales were up nearly 7% in the quarter driven by strong performance in northern European markets and across Europe, our year to date market share was 7.7% down a one and a half point versus prior year.

Overall Asia Pacific was down 5.5% versus year ago, driven by declines in Japan, and Australia. However, we did see nice growth in the China and South Korean markets.

Across the dealer network, we finished the quarter with worldwide motorcycle inventory down at 34%, we remain committed to our approach to supply and inventory management and we are encouraged to see these actions driving long term fundamental improvement across our business and driving value for our customers.

Our objective is to deliver desirable and profitable volume not simply unit growth.

We do expect that our market share will be volatile over the coming quarters, as we reset model year launch timing and retail inventory levels remain tighter.

As we look to wholesale motorcycle shipments in Q3, we were down at 6.2%, primarily driven by declines within the curing family.

Overall revenue was down 9.8% due to the unit volume decline on.

On a year to date basis. The average motorcycle revenue per byte was relatively flat year over year with positive impacts from lower sales incentives and higher pricing offsetting the unfavorable mix shift due to more sportsters and cruisers persons touring bikes.

Moving onto margins total absolute gross margin was down due to unfavorable product mix lower shipments and unfavorable foreign currency exchange. These negative drivers were slightly offset by favorable raw material pricing and lower incremental tariffs within manufacturing the.

Q3 gross margin as a percent of revenue was essentially flat to year ago.

Total Q3 operating income was largely flat versus last year with strong cost management within SDMA offsetting the absolute gross margin declines and restructuring expense.

Year to date asked you know it was down a $136 million, which is in line with the committed to plan cash savings declared in the face of the COVID-19 pandemic.

The financial services segment operating income in Q3 was $91 million up 25.1% compared to last year net interest income was down $16 million due to higher average outstanding debt as we proactively manage our liquidity in the face of the ongoing pandemic.

The Q3 total provision for credit losses was $26 million favorable to Q3 last year. This includes a $20 million decrease in actual credit losses, as well as a $6 million decrease in the allowance retail credit losses continued to be down versus last year as a result of lower delinquency.

He is driven by a high volume of Colgate related loan payment extensions for qualified customers as well as improved use motorcycle values at auction.

The increased volume of extensions, which occurred during the second and into the beginning of the third quarter of this year resulted in fewer past due accounts and lower repossessions in losses.

Improved use motorcycle value stem from a lower number of motorcycles at auction and limited new inventory in dealership.

The overall change in the allowance for credit losses was favorably impacted by a modest improvement in the company's outlook on economic conditions. During the quarter. However, there continues to be significant future economic uncertainty as KOVA 19 continues to restrain the U.S. economy.

We believe the allowance for credit losses appropriately reflects the company's outlook on economic condition and represent estimated lifetime losses in our portfolio at the end of the third quarter.

Financial services retail originations in Q3 were down 4.2% versus last year. However, our market share for new U.S. retail sales remained strong at 67.5%.

New retail motorcycle originations were down on lower new retail sales inventory availability, partially offset by higher use motorcycle originations as dealers supplemented the shortfall of new inventory with youth sales.

At the ended the quarter H. DFS had $2.83 billion of cash and cash equivalents and $1.13 billion of liquidity available through bank credit and conduit facilities for total available liquidity of $3.96 billion cash and cash equivalents remained elevated as we prudently holdco.

Cash in the face of economic uncertainty.

As of Q3, HTS <unk> debt to equity ratio was 4.6 to one this is well within our debt covenants, which required debt to equity to be no higher than 10 to one.

[noise] HTS is retail 30 day, plus delinquency rate was 2.59% down a 116 basis points compared to the third quarter of last year the.

<unk> retail credit loss ratio was also favorable at 1.4% of 43 basis point improvement over the third quarter of last year.

The favorable delinquency performance was primarily driven by a high volume of Kobin related retail loan payment due date extensions for qualified customers.

Many of the extended accounts have made at least one payment after the expiration of their extension period, we do expect that the delinquency rate will normalize as customer space longer term financial impacts from Cove at 19.

The remaining Harley Davidson Inc. financial results are summarized on slide 14, we ended the quarter with $3.56 billion in cash and cash equivalents again, maintaining high liquidity as we manage through the pandemic.

Year to date operating cash flow was $1.14 billion in favorable to prior year, driven by lower inventory levels and favorable cash flow from wholesale financing.

As the charts on slide 15 demonstrate we believe that overtime, we are a leader amongst our peers in return on invested capital at the Motor Company and return on equity at H. DFS and we are a demonstrated leader in our ability to generate cash.

Our year to date effective tax rate was 10.8% compared to 24.6% last year. The decrease was primarily due to discrete income tax benefits, which reduced the companys income tax expense expressed as a percent of the pre tax income.

[noise] shareholder returns in Q3 included a quarterly dividend of two cents per share we did not repurchase any of our stock on a discretionary basis during Q3 and do not intend to repurchase stock in Q4, as we continue to preserve cash given the uncertainty of the ongoing pandemic.

As we assess the current environment and the Pandemics impact on the global economy, and our business. It is difficult to reasonably forecast our financial performance and we're not providing guidance at this time.

To wrap up the financials, we saw some positive financial signs in the quarter, including an improved quality of earnings realization of that re the rewire assay in a reduction and a strong balance sheet as we look to the rest of the year. We continue to expect to be impacted by our model year timing change and our continued focus.

On inventory and supply management we.

We are confident the rewire will strengthen our business.

And now I will turn it back to Yoking, who will share a first look at the hardware.

Thank you Gina.

The reason why is the execution of a playbook that creates a strong foundation for the company, including a new operating model that relaunch the organization for performance reduces costs and sharpened focus on profitable products and markets.

The reason why a foundation will be the starting point for the hotwire, a forthcoming five year strategic plan to deliver profitable growth and shareholder value based on building and expanding the desirability of <unk> Davidson.

The work we are doing to develop our five year strategic plan and the positive initial results. We are seeing reinforces our belief that a strategy grounded in desirability like path forward.

As I mentioned last quarter I would like to share first look at the hot wire that is coming into focus now.

Oh strategic plan will be guided by a new vision and mission.

Our vision is to build on our legend and lead our industry through innovation evolution and emotion.

Our mission is more than building machines, we spend for the time this pursuit of adventure freedom for the show.

Both statements will keep us grounded in authentic brands delivering adventure and freedom in only the way Harley Davidson Ken.

The basis of the Hotwire is Harley Davidson being the most desirable motorcycle brand in the world and the company that the funds more decisive type of culture globally.

Desirability it will provide the framework for work and fall a success measures.

It will be organized around a desirable growth strategy for motorcycles parts and accessories and general merchandise in priority markets.

Desirable customer focus inclusive of distinct product brand and purchase experiences.

Desirable operations that a high performance lean and efficient.

Desirable impact with emphasis on inclusive stakeholders stakeholder management and delivering long term value.

And the desirable workplace that this diverse inclusive and build the wrong top talent rooted in a high performance winning culture.

Let me give you a few details on each of these aspects that are under development as part of the hot weather.

Desirable growth would be based on the appropriate balance of our strongholds segments and new segments, where we are best positioned to win.

We strive for products that are best in class leveraging the Harley Davidson tradition, and priced to match or with our value.

We believe this meaningful headroom in our stronghold motorcycle segment, and we intend to defend and grow our leading positions.

We are aligning our investment strategy to further push innovation in these segments.

Reinvigorate the attraction for customers that love these products and capture the growth spurred by renewed interest in outdoor activities.

We also believe we have room to grow profitably with attractive new products adventure touring for example will redefine our market participation in a very positive way.

Segment is highly aligned with our capabilities and our mission.

Beyond these segments. We believe they are for the check different strategic opportunities that support our long term evaluation and evolution.

We are exploring these with focus and rigor recognizing the importance of balancing that potential within our investment framework.

Finally, we believe there is a large untapped opportunity to grow our complimentary business.

Parts and accessories general merchandise and H. DFS by speaking not only to those writers who purchased new bikes, but to the large installed base of existing Harley riders.

We are actively exploring ways to kept ways to capitalize on the broader Harley Davidson community right as significant as it.

We believe there is immense potential in building a future looking customer journey that combines the best of all what these capabilities with Harley Davidson enhancements supported by digital.

For that purpose, we're taking a clean slate approach to building future experiences that would contribute to keeping why does engage and also with meaningfully deliberate and our mission.

This approach will be designed to run into perspective, when our customers that is less rooted in demographics and more focused on that attitudes and attuned to add customers along the purchase and ownership journey.

We are assessing transformative moves to reinvent our operations.

As discussed the re wise delivered meaningful efficiencies in how we operate from procurement to inventory management.

The Rewire. However has also brought to light opportunities to continue to transform our way into it and supply chain for the efficiency and cost effectiveness.

The past few years, both significant dislocation to operations in response to external dynamics, particularly for European markets.

We'll now turn our attention to addressing these impacts to support our future strategy.

Life with this our guiding principle is to be cost in the first by ensuring the right flexibility customization potential price points and service levels for all markets working back through the supply chain in order to deliver on the site.

We will we will examine every assumption about how we operate and we believe the significant potentially in this effort to power the next level changing cost and efficiency.

Inclusive stakeholder management will be unifying theme for all rolled in society.

Celebrating units is at the root of our mission Folly, Davidson, who will walk the talk in every aspect of our business from diversity to environmental responsibility to employee empowerment.

We think about inclusive stakeholder management as increased unity of purpose.

United We will ride.

Last but certainly not least just as critical as the business overhaul to leave not the company's soul and spirit, our culture must also evolve.

We're moving fast, making swift changes and all of us together, including our dealers need to up all game substantially to compete successfully in the coming years.

We are calling our cultural journey Harley Davidson number one representative power recognizable number one logo that it was introduced in 1969 to celebrate the National Championship.

Felipe Davidson racing teams have historically used the number one on the winning motorcycles.

The number one is uniquely ours.

It's an iconic symbol of winning and the hard work and high performance it takes to get there.

We are redefining our culture, our organizational principles employee engagement and expectations to focus on the strength and spirit of our hundred 17 year legacy.

He is our ability to define success.

The Hotwire, we'll talk a growth that is focused and profitable across the businesses.

Our targets will be achievable, and we will not pursue growth madly for growth sake.

All brand is powerful and recognized globally backed by the incredible heritage and iconic products.

We have a new foundation to execute a new strategy that will solidify our place as the most desirable motorcycle brand in the world.

We are committed to this multi year journey.

Now we'll open for questions.

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Well first question will come from the line of James Hardiman with Wedbush Securities.

[music].

Hi, good morning, Thanks for taking my call.

Two part question [laughter], the way I'm going to get around that but oh.

Maybe talk a little bit about this new distributor model help us understand.

Obviously, I think you've identified some of these markets is maybe not paying for the home run that you once thought that they would be.

But it doesn't sound like you're necessarily giving anything up on the topline by going through a distributor model.

What is the impact on margin ultimately are you sort of giving back whatever cost savings you might be getting a.

From exiting those markets for manufacturing perspective.

Giving that.

Some kind of revenue to your to your partners and those markets. It was understand that a little bit better and then I guess more broadly.

I think the long term top line potential after you're done with with a lot of the cost cuts that are that are underway here.

Is that necessarily less than it once was is it similar to what once was or is it even maybe greater than it once was like.

So James this is Larry let me take your first part of your question really we don't see a whole lot of impact to margin on the change to distributor models. I mean these are not if you look at overall number of units ER compared to total motorcycle shipments or a retail sale.

As for the company are not that large and a lot of cases. These are you know in in smaller markets. These are single dealer markets maybe to dealer market. So so once again not.

Not not a huge impact.

From that so overall, we think that the.

The overall impact probably us is not that great.

Thanks.

To your second question James well it depends on what you want to compare to what when you say what is the long term topline potentially less than it once was I would need to know what the ones was was so but are we at American.

Not given you know topline guidance at this point.

And I think the the leaf focus that we've.

We've done with the revised strategy will obviously you know also impact I will hop wireless strategy. The key is not the topline growth.

Growth. The key is that we want to grow Desirably and profitably. So this as I said you know, it's really important to bear that in mind, we don't want to grow for the sake of growing we want to grow profitably and if we can grow profitably well will will will take that at the time that happens having said that we do see a lot of potential I mentioned.

Parts and accessories general merchandise.

HD, if as and we do see of course also potential in our motorcycle business, but the focus is key and we're trying to do everything at once and making sure that what you will launch in terms of existing categories and new categories is manageable with a powerful go to market process. So we believe growth comes through focus as well.

And the reason why it has reset our operating model and it was not a as I mentioned, a just a initiative to reduce costs, but to really make us.

And efficient effective and high performance organization. So it was done very carefully.

But you know without compromise really setting us up for a.

Foster more focused less complex organization.

Our next question will come from the line of get Johnson with BMO capital markets.

Hey, good morning.

So when we walk into some dealerships that kind of a ghost towns.

Okay, so not getting any banks until February so clearing your shipped about 25000 bikes in the U.S. So how are you allocating those motorcycles to dealership base.

So so garik.

Yeah, we are looking at dealer supply right and we are measuring dealer supply and we are filling based on a days forward sales for dealer. So so you know the dealers who are call it shortens supply relative to our projected.

Forward sales over the next couple of months.

Get supply first and then and then we we continue to work down the list like that.

I would say at the end of the quarter.

We were you know.

Pretty close to a couple of months forward sales at our dealer show So we actually.

You know felt decent about our strategy and that we are probably a little like you know at that point as we went through the quarter.

Sure.

Our next question will come from the line of brand around you with Northcoast research.

Good morning, Congrats on the strong earnings performance I guess my question was kinda also on the dealer base.

Could you kind of break out the impact of dealers, possibly going away or being eliminated as you create a stronger more profitable basin I guess that break that out from a shipment in retail perspective, if you can.

So so we probably won't.

You have that kind of detail on this what I, what I will say is that you know we have closed about 61 full line dealerships I think as it was reported in.

The comments, you know about 4% of our of our total.

And that.

Those those are.

Those are call it closures combined with our managing inventory up at a much tighter in line with supply and demand.

Driving some real positive impacts for our dealer network, where we're seeing improved pricing on a news motorcycles were seeing improved new.

New motorcycles selling right around MSRP, we're seeing a tightening of the gap between pricing for new and used motorcycles and I would say that despite lower sales we.

We have seen.

Improvement in dealer profits and in fact, many dealers, having very strong profits throughout the that the third quarter. So dealers are certainly seeing the benefit of all these actions.

Great to hear thanks.

Our next question will come from the line of Greg Badishkanian with Wolfe Research.

Hey, guys. Good morning, its actually Fred Wightman on for Greg you in your prepared remarks mentioned plans to defend and grow your leading position now when you were talking about hard wire, but the U.S. share was down over 800 basis points again on the quarter. So I understand that that's going to be volatile, but can you sort of help us understand what's your expectation.

For that metric as we move into the beginning part of next year and the model year reset takes place.

Yes, Thank you Fred look.

Look we've always said that market share right now it doesn't really matter simply because we have to focus not on volume but on desirability.

And we will not devalue our brand by Oversupplying, the market, resulting in price promotion and discounting activities, which have seized this quarter and also in the previous quarter and we will not pursue volume growth at the expense of the right fundamentals for business and that is very much the case for this year.

So we are all I can say right. Now is we are focused on taking the needed actions to ensure.

That we are the most is algo motorcycle brand in the world and as part of that we are managing inventory line and or rather a little short of demand.

And as Larry just said these actions are driving the intended results increased demand and increased pricing for use motorcycle dealers are selling new bike at or very close to MSRP higher dealer profitability and I think that's what really Collins and while some of our competitors are rather price aggressive.

It's not something that we want to buy into and hence there was quite a inventory glut in the system that we manage to now work through the system.

Due to COVID-19 and our restricted.

Inventories policy and that is showing the right results what that will mean in terms of market share going for what we would call them into on a once the hub for life strategy.

Strategy is a is launch but as we said this is not just about market share. This is about a desirable market share and for that we had to take the actions. We have we had to take that would be done by the end of the yet and from bad we can rebuild.

And certainly our goal is to expand market share desirably into future as well as part of the hotwire strategy profitably, though.

Our next question will come from the line of Shawn Collins with Citigroup.

Yes, Craig Thank you.

Okay, changing Shannon good morning.

Hi, My question is on manufacturing in the U.S. and if you are possibly seeing any supply chain disruptions or complexities.

I think Polaris cited in trim it will supply chain disruption this morning.

Snowmobile segment, so how much.

When I talk about that subject I appreciate it thank you.

Yes Shawn.

Supply chain disruptions, we don't see right now obviously, we had disruption when our factories, but close and as part of the restarts.

Has it become much more complex, absolutely and the but I think the team has done an extraordinary job.

To to navigate through co with Nike, we have the right to safety security protocols in place you know today.

To deal with coal with 19.

And we havent seen any substantial shutdown since so and supply chain to you know, there's always one or the other smaller disruption, but nothing significant at this point in time.

Okay. That's great. That's helpful. Thanks, Thank you very much for the color and insight.

Our next question will come from the line of Adam Jonas with Morgan Stanley.

I'm, a fan and congrats Gina welcome to the team I Hope you don't think that a stock price up 15% every earnings result, as normal. It's nice just isn't normal this isn't I wouldn't I wouldn't extrapolate [laughter] well call. The Gina fact, okay.

Just one question are you all kind of in your closing remarks, you yeah.

You kind of piqued my interest when you talked about beyond after your comments on adventure touring you said beyond these segments.

I'll have to check the transcript, but you said were one I continue to look at attractive and strategic segments, and we're exploring them where the rigor.

I I think I mean, I'm, probably crazy, but I can't I can't help but think about three wheel and four wheel on and off road adventure vehicles both.

And I see power trains and also BV powertrain could this categorically be included in one of those potentially unexploited opportunities for Harley Davidson.

Well, thanks, Adam I would say it cannot.

Be categorically exclude it but I don't.

So you know look at this point, we are looking at every opportunity to that is the key thing is focusing on the things that we think have the most potential for success.

And that means clear focus on our core segments expansion and that's the majority of our business, but that doesn't exclude certainty of three weeks simply because our truck business has been quite successful, we see potentially in that and I'm not going to rule out full we as blood you shouldn't take that as an indicator.

I think that we will get into four years, but you know once you defend or why that you develop a new strategy I think everything has to be at the table and there's certainly no categories that we don't think could potentially be an opportunity either in the short mid or long term I know that's a little cryptic.

No I understand I I'll keep it at that we are catching up already not excluding anything but that doesn't mean that we will certainly not jump into everything that offers an opportunity we want to stay very focused and any adventure. We are taking it will need to be very thought through and and.

Chances of success or have to be very high and we need to see a competitive advantage that we bring to that new category that we might and to with the Harley Davidson brand and our product.

The next question will come from the line of Felicia Hendrix with Barclays.

Hi, good morning, Thank you so much.

And as you look into the future maybe not so far assets call. It mid term.

What do you think is the right normalized run rate for worldwide shipments over time do you see the company getting back to 200000 units a year and then Austin when do you expect the motor company to get back to regular introduction rate of new model.

Well Rick regular introduction of new models will start to next year. What has just changed is that the the changeable more of model year to model you is no longer happening in oil because it's all happening at the beginning of the new years. So that's a one time effect from here on we will continue to introduce new models through.

For the year, but with the model year changeover actually happening in the calendar year.

The Chen or the change over.

As supposed to happen rather than the year before.

Look we are not commenting on run rate and units a normalized I mean, and I don't want to really give any guidance for next year. At this point in time I think we've done what we need to do in terms of making sure that the base of our business is desirable and that is a good platform or to grow and to.

But I I need to leave it at that today.

Okay, just to clarify on the first part I I, probably should have been more clear in terms of.

As a I guess the cadence goes yes, she's actually I know that Adam years, changing just in terms of the number of new model a year I mean without any kind of more of a gradual ramp or well, it's certainly easier right away the carry over bikes and as the majority of new bikes will be launched in the first quarter.

But we will have launches are also a in one or the other quarter. Following the new model introductions. So not every new product will come in the first quarter Oh future years, we don't I don't think that that makes much sense or you want to make sure that there's enough new product out there in the following quarters.

You know to create desirability end demand. So the majority, yes first quarter, but they often they will be either new categories that we or segments that were venturing into or new you new products in particular in our core segments.

Our next question will come from the line of Jamie Katz with Morningstar.

Hi, Good morning can you just delineate what the 39 markets that youre exiting represents as a percentage of sales and profits. So we can get an idea of what that is.

Packed up that might be and then just a clarification I think the language that you used it for on average selling prices said they were flat year over year, but I think maybe that's stripped out.

Mix shift I bet on so.

So if I did my math right I think actually the Asps were down can you just confirm that thanks.

So Jamie I can take the first part of your question the impact on sales and profits of the of those markets. We are exiting is minimal.

Probably a.

Less than 1% of worldwide unit sales.

And and profit like I say profit really not particularly meaningful.

Yeah, and the average selling price hasn't really changed that much and as Larry mentioned earlier. Our MSRP is you know has actually going not going up so there's not a significant shift within the models.

And within the segments and but obviously, there's some impact.

Due to the decline in the touring segment, but overall you know all the segments are holding up holding up well according to our plans for for this year.

Thank you.

The next question will come from the line of Craig Kennison with Baird.

Hey, guys. Good morning, Thanks for taking my question and Gina Congratulations most.

Most of my questions have been asked so I'll shift to a bigger picture question on California has proposed a ban on gas cars by 2035, obviously motorcycles are not cars, but it's not hard to connect the dots. So to what extent are you preparing Harley Davidson for any similar action against gas powered motorcycle.

Goals.

Yeah. That's that's a good question and the and that's why we are we have launched a life why and you know we believe are electric is needs to play an important role in the future of Harley Davidson, it's still in the merchant category.

So you know sales volumes and volumes are relative but from what I can see through all this we actually believe that life was the best selling electric on highway or do we'll electric motorcycle in the U.S. actually selling more than doubled the next highest electric motorcycles.

So that means you know we are leading a leading the way we have an extraordinary product and that is the starting point to continue to expand into electric motorcycle segment. So we believe it is important.

We have a an important role to play we are leading in the segment Khalid Lifeway as just being elected as the best electric motorcycle and 2025 motorcycle news, it's an extraordinary product and its the starting point or two more so we are fully committed to electric not just because of Kelly.

For any of that because we believe it can be an important segment that must be as important segment in the long term future of the company and its also attracting new riders and new customers to the brand that might not have considered Harley Davidson before.

Thank you.

The next question comes from the line of Joe Altobello with Raymond James.

Hey, Thanks, good morning, everybody.

So just a quick question on stealing obviously down nearly 70 million in this quarter. So down roughly double that you gave how much of that reduction is sustainable and there's $200 million a quarter roughly a good run rate something about 2021, I'm, assuming some cost savings that we expect.

It's a mixture of Cowen related I'm, probably come back next year, but then you've got the restructuring sooner than talking about next year as well. So just trying to a sense of what the <unk>.

Well, what a good run rate for US you know is going forward. Thanks.

So coming back to ask you name, what we've committed to from a restructuring standpoint, obviously, we we've said that theres, a 169 million of restructuring costs and that equates to a $115 million or the ongoing ongoing savings and that estimate remains unchanged. So I wouldn't take.

This quarter as the run rate that I would move throughout because there's a combination of those kind of the near term actions that we took to kind of reserve and preserve cash in the quarter I would anchor to that $115 million of annual ongoing savings.

Okay. That's helpful. Thank you.

The next question comes from the line of David Macgregor with Longbow Research.

Yes, good morning, everyone.

Well certainly the long term plan is very exciting here, but just focusing on the near term you you'd mentioned earlier that a market share doesn't matter right now, but I would like to see if you could explore first at 840 basis point drop in the market share and I realize it's probably good measure that's the planned inventory retractions, but could you say.

Brito for US just the impact of the inventory Retractions from just what the competitive dynamic was in the quarter. Thank you.

So.

David I would say a couple of things. One is we you know there there were some growth in the market in certain parts of the market, where we don't compete a this quarter. So that certainly had an impact on the on the market share.

The you know the not having.

The new model year launch.

Certainly had an impact as well normally we see a little bit of a lift when you know when in September after those new bikes are introduced and then and then combine with that I think you know the impact as we talked about in the prepared comments about tighter inventory management, certainly had had an impact as well so.

Combination really of those three things I think drove the market share, but as we've said that you know the trade off.

Ben stronger pricing of new end use motorcycles better profitability for our dealers higher margins.

For our dealers so I'm, sorry, I think we are.

Really executing our you know our strategy of building desirability for Harley Davidson motorcycles, and the and the brand.

And to add to what Larry said no promotional activities, we had no promotion a significant promotion in the market in comparison to some of our competitors that have been highly promotional and continues to be highly promotional.

The next question is a follow up question from Gary Johnson with BMO capital market.

Hey, Sorry go ahead your line is that right.

[laughter] our question for June or just in general surprises, where you're most excited about how your townsquare spinnaker covered it.

[noise] I surprises in China, I guess I'm overly I'm Super excited to be here I'm Super excited to be part of this amazing transformation Oliver the kind of the actions that you can laid out and the actions that the leadership are taking very inspired to be part of the journey that they're on so I don't know that I have.

Any any real surprises but.

I guess pleasant surprise that there is that there is an organization that has lined up behind this mission and ready to go which is great.

Thank you.

We have a follow up question, Adam Jonas with Morgan Stanley.

Oh forgive me if I missed this but can can you remind us when we should expect to hear the five year plan. The hardware plan next year sure.

Sure that's going to be with the announcement of the fourth quarter results in February.

Okay. So it's there so its simultaneous not a separate its.

It's just the part of the normal earnings presentation, that's not a separate capital markets day as such but no. That's correct great. Thanks, Yeah I appreciate it.

With that we are showing actually we just received a follow up from James Hardiman slip let the securities.

Hey, Thanks for taking my follow up here so.

Lastly September was the month, where the the modeled year comparison tough it's safe to say that if I think about sort.

Sort of a 10% decline domestically and 8% globally. They thought was probably worst in September just trying to think about how I should frame the fourth quarter.

If I think about sort of retail, which you know were still going to have that difficult comparison from a from a model year perspective and then.

I look to next year I'm not going to ask you anything about guidance, but just maybe help.

Help us understand if there there's going to be significant fallout from these markets you're exiting it doesn't sound like they represented much in terms of overall shipments are overall retail, but I don't know is there going to be a material impact from exiting market as I think about.

Shipments in 2021.

So James on the I'll, just what I'll talk about a third quarter kind of the sequencing of the.

You know the sales that we went through the quarter. If you will you know sales were pretty solid in the month of July.

And then and then really through the first three weeks of August you know that would then then you start lapping those last five weeks of the quarter.

Or where you're you're lapping you know the new model your introduction and that's where we really saw I think some some decline, particularly in the U.S. market, which tends to have a stronger sale of those new proud.

Products and then as I said earlier the impact of these markets were exiting a lot of small markets lot of kind of one to a dealer markets.

So so not a significant fall out next year that we expect on and market exits I mean, there will be some but but not a not a meaningful.

Perfect. Thank you.

And with that we show no further audio questions I will now hand, the conference back for closing remarks.

All right. Thanks for joining us today, everyone. We appreciate your interest in Harley Davidson have a fantastic. Thanks bye-bye.

Yes.

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