Q2 2021 Harley-Davidson Inc Earnings Call

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Good day and thank you for standing by welcome to the Harley Davidson 2021 second quarter Investor Analyst Conference call. At this time, all participants are in a listen only mode. After the speaker's presentation. There will be a question really on for.

Session to ask a question during the session you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded if you require any further assistance. Please press star zero I would now like to hand, the conference over to your Speaker today, Shannon Burns manager Investor Relations. Please go ahead.

Good morning, everyone.

You can access the slides supporting this call at Investor Day at Harley Davidson Com.

The earnings materials box in the center of the page.

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 SEC.

Harley Davidson disclaims any obligation to update information on this call.

Joining me. This morning are CEO, you'll convey CFO, Jean together and Chief commercial officer of Delek Sullivan will also be joining for Q&A yoga and let's get started.

Thank you Shannon and good morning.

As always I would like to welcome all the shareholders the financial community dealers employees and all our valued stakeholders and even our competition who are joining us today.

We delivered a solid performance in the second quarter on first half of this year.

I'm pleased with the pace of improvements we've seen with today's numbers, reflecting the execution of our hotwire strategy as demonstrated by the positive financial results despite significant supply chain challenges.

As a company we continue to manage through the impact of COVID-19, with the extraordinary efforts of our global team keeping employee safety and community well being a priority.

The supply chain and logistics challenges linked to the pandemic faced by our industry and many others continue to impact the sector with our teams managing the effects of disruption to ensure that we are able to continue building and delivering iconic Harley Davidson products to the world.

We're seeing the initial proof points of our hotwire execution and the positive impact of this strategy on our results, particularly in the strategically important North America region.

While the pandemic and the related supply chain complications continued to impact on international business with certain regions at different stages of a post pandemic recovery, we can see that consumer excitement and optimism is returning and we are encouraged by the signs of positivity in the market.

I also want to note our continued fight against the proposed EU tariffs that we discussed at the last quarter.

We continue to pursue all remedies to the additional EU tariffs.

We believe these terrorists related to a trade dispute not a fall on making and that is unfair flow of business to be targeted as part of this dispute.

The initial outcome of the trade talks at the G 7 beating on encouraging and we remain hopeful for resolution.

I will talk more about our delivery against the Hotwire later in today's presentation, but first I'll, let Gina and provide more details on the financial performance of the quarter and first half of the year Gina.

Thank you you can.

Second quarter results reflected continued strong demand and improved operating margin as we manage through a volatile supply chain environment.

Revenue of $1.5 billion with 77% ahead of last year.

We lapped the impact of the Covid shutdown.

Given the 2020 dynamic to help contextualize. This year's performance. We've included comparisons back to 2019 for this quarter.

Revenue was down 6% versus 2019, primarily driven by the actions taken as part of the rewire to prune unprofitable motorcycles as well as exit unprofitable markets.

Total operating income of $208 million was significantly ahead of 2020, and 9% ahead of 2019 with growth across both of our reported segments.

The motorcycles and related products segment delivered $186 million on operating income, which is $307 million better than 2020, and 3% better than 2019.

Even though the quarter had 12000 fewer units in 2019, we benefited from improved motorcycle unit mix significantly lower sales incentives as we focused on building desirability and a reduced cost structure behind our rewire actions.

The financial services segment delivered $95 million of operating income $90 million better than 2020, and 25% ahead of 2019.

Second quarter GAAP earnings per share of $1.33, with $1.93 ahead of Q2.2020.

When adjusting to exclude the impact on EU tariffs and restructuring charges. Our adjusted EPS was $1.41 up $1.79 over prior year.

Turning to year to date results total revenue of $3 billion with 37% ahead of 2020 and 2% behind year to date 2019.

Again, the decline versus 2019 was primarily driven by the actions taken as part of rewired to prune the portfolio and partially offset by increased volume driven by the shift in model year launch training and improved unit mix.

Total operating income of $627 million with $635 million ahead of 2020, and 48% ahead of 2019.

The strong growth versus 2019 was driven by the Rewire actions noted as part of our Q2 performance, including favorable mix lower sales incentives and reduced operating expense.

The shift in timing of the model year launch had a positive impact as well.

GAAP year to date earnings per share was $3, 1 up $3.16 turns from a year ago, while adjusted year to date earnings per share was $3.11.

Up to 98 from last year.

Global retail sales of new motorcycles were up 24% in the quarter behind strong demand for core touring and large trees or product in the U S. As well as the successful launch of our Pan American motorcycle into the adventure touring space.

North America Q2, retail sales were up 43% versus 2020 and up about 5% over Q2.2019.

Gross over 2019 was driven primarily by improved sales in our core segments touring and large cruisers.

In our international markets Covid continue to have an impact with many key countries in various states of lockdown and reopening throughout the quarter.

We also experienced a continuation of the logistics challenges noted in Q1, which resulted in longer ship times to keep ports.

EMEA sales recovered after much larger declines in Q1 and sales of touring and cruisers rebounded. This improvement was offset by our decision to not South Street and legacy Sportster bikes.

The Tam declines were driven primarily by rewire actions to close certain dealers exit countries and take pricing actions across select model.

We believe these actions are working to restore profitability across the market in spite of the retail unit declines.

In Asia Pacific in particular in India, and Australia, Q2, retail sales were negatively impacted by the discontinuation of street motorcycles.

The region was also disproportionately impacted by global transportation headwinds.

Worldwide retail inventory of new motorcycles at our dealers was down over last year and down versus the previous quarter.

Inventory levels were lower than originally planned driven by stronger than anticipated demand coupled with longer shipping times in our international markets.

While we originally had planned for Q2 inventory levels to build coming out of Q1, we have seen at these lower levels have helped to foster increased desirability as evidenced by strong new and used motorcycle retail prices in the U S and continued improvement in dealer profit profitability in the quarter.

International markets have seen a much larger impact from the global transportation challenges and it's likely some markets have seen retail sales impacted.

Looking at revenue total motorcycles segment revenue was up 99% in Q2 and up 45% on a year to date basis.

Focusing on current quarter activity 81 points of growth came from higher year over year volume on motorcycle units and parts and accessories as we lap last year's pandemic impact and work to meet the strong current year demand for our motorcycles, which includes the new Pan American.

13 points of growth for mix driven by a larger percentage of touring bikes in the quarter, along with favorable regional mix behind strong U S shipments.

5 points of growth from foreign exchange and finally, 1 point of growth from pricing and incentives as we eliminated a majority of corporate discounts and incentives as part of the hardware strategy.

Absolute Q2 gross margin of 36% was up 14, and a half points versus prior year, driven by stronger volume and favorable unit mix.

Higher logistics, and raw material inflation and incremental EU tariffs were more than offset by volume leverage and other savings across our supply chain.

Q2 operating margin finished at 14% and was up significantly versus prior year due to the drivers already noted.

The gross margin gain was partially offset by higher operating expense as we lap the cost savings initiatives undertaken last year to preserve cash at the onset of the pandemic.

The supply chain remains very fragile not only for our business, but for every global manufacturer. Our team has continued to do a great job managing through the unprecedented challenges and to date, we've had no sustained downtime in our factories.

We've continued to see inflation across all modes of freight as well as within raw materials and we are forecasting this to continue throughout the fiscal year.

To help offset we implemented an average 2% pricing surcharge on select models in the U S. Effective July 1st for the remainder of model year 'twenty 1.

The financial services segment operating income in Q2 was $95 million up $90 million compared to last year.

Net interest income was favorable for the quarter driven by lower average outstanding debt and cost of funds as compared to the second quarter of last year.

The total provision for credit losses decreased $75 million year over year, primarily due to the reserve rate changes of $63 million as we lapped last year's increase which was largely driven by the economic impacts of the pandemic.

In addition, actual credit losses were $12 million lower.

The favorability on credit losses was due in part to benefits provided to individuals under the recent federal stimulus packages. Additionally.

Additionally, motorcycle values at auction remained elevated as the supply of used motorcycles was limited and demand remained strong.

Looking at each DFS is base business, new retail originations in Q2 were up 29% versus last year behind higher new motorcycle sales and strong used motorcycle origination volume at.

At the end of Q2, H DFS had approximately $820 million in cash and cash equivalents on hand, and approximately $1.3 billion and availability under its committed credit and conduit facilities for total available liquidity of $2.1 billion.

Cash and cash equivalents remained elevated but were down approximately $900 million from Q1, as we continue to pull cash back down to normalized levels.

H DFS is retail 30 day, plus delinquency rate was 2.21% up 46 basis points compared to the second quarter of last year, which is a high point in issuance of pandemic related extensions.

The delinquency rate continues to be favorable when compared to recent history.

The retail credit loss ratio remained historically low at 8.4%, a 103 basis point improvement over last year.

While we do expect the delinquency rates normalize overtime, given the influx of stimulus funding and the improved economic conditions. We believe it's likely losses will continue to remain low through the remainder of the year.

Wrapping up with Harley Davidson, Inc. Financial results, we delivered year to date operating cash flow of $644 million up $34 million over prior year.

Key driver of improved cash flow with higher net income, partially offset by an increase in wholesale finance receivable originations cash.

Cash and cash equivalents ended the quarter at $1.7 billion, which is $2.1 billion lower than Q2 last year as we worked on the higher cash balances that we held as a result of the pandemic.

As we look to the balance of the year, we are maintaining our guidance on the motorcycles segment revenue growth of 30% to 35%.

For the motorcycle segment operating income margin during the second quarter. The European Union made a decision to implement a 6 month stay on raising the incremental tariffs from 31% to 56% on negotiations occur between the U S and the EU.

Step up in tariffs was originally planned for June 1st and it will now be in effect in December if a resolution does not take place prior to then.

Last quarter, we provided 2 margin guidance ranges due to the uncertainty on how the tariff situation would evolve we had stated our official guidance to be 7% to 9%, which assumed complete mitigation of the incremental tariffs.

With the full impact of the incremental tariffs our guidance was 5% to 7%.

Given the developments throughout the quarter, our tariff exposure in 2021 is more certain but less than what we originally communicated.

Based on what we know today, our estimated tariff impact this year is approximately $80 million versus the initial estimate of $135 million.

This improvement would result in our estimated GAAP operating income margin moving from 5% to 7% tour to our revised guidance of 6% to 8%.

If we are successful in materially mitigating the incremental EU tariffs for the remainder of 2021 and get back to the planned tariff rate of 6% our operating margin range would remain 7% to 9%.

We are increasing the financial services segment operating income growth guidance $2, 75% to 85%, which is an increase from the previously communicated range of 50% to 60% the.

The improved outlook takes into account the loss favorability, we have seen year to date as well as the outlook for the rest of the year.

Lastly, capital expenditures remained flat to our original guidance of $190 million to $220 million.

Slide 14 provides additional context on how our seasonality and strategy shifts impact the back half of the year discharge is largely unchanged from the previous quarter with the 1 exception and that now includes the impact of the EU tariffs.

Assuming the $80 million tariff impact, we expect a back half operating margin percent to be negative mid single digits.

This back half guidance incorporates the impact on the shift in model year launch timing low.

<unk> and raw material inflation rates in line with what we've seen throughout Q2.

Approximately 2% pricing surcharge and a step up in operating expense as we invest into the hardware and prepare for the launch of model year 'twenty 2.

I'll turn it back to Johan who will take us through our progress executing against our hardware our strategic plan.

Thank you Gino.

As the hardware is strategic plan is implemented we continue to enhance organizational speed alignment and deficiency, which we believe have set us up to win.

The changes implemented 3 re why on 2020 on the international hardware related outcomes underscore the significant transformation of Harley Davidson over the course of the past year.

We continue to be guided by HD number 1 is a high performing winning organization based on our 10 defined leadership principles builds on the powerful vision and mission of Harley Davidson.

Across our company, we continue to see the desire and growing capabilities of our team to win.

No all future successes will only come from an effort by everybody on our team.

Thank you team Harley Davidson I know many of you are listening in today.

Talking about winning I'm excited that this month's our holidays are screaming Eagle right Wyman when the inaugural Motor America King of the Beggars Championship series aboard as Harley Davidson Road glide special.

Everyone is holiday because as mentally proud of all racing team for the tireless commitment to secure this championship.

Cause incredible dedication and focus on winning was matched by the passion and energy of the team for pilot Davies with engineers, who develop these bigger race bikes constantly working to improve the performance of these remarkable motorcycles.

This team and this success truly exemplifies the spirit of HD number 1.

Not to mention 1 of those rates, despite having as Amin cost following an injury or surgery only couple of weeks before the final rate.

200, David Zero.

This win is a strong statement for our ability to lead and innovate in our core Grand American touring segment.

As I've said since we started this journey hotwire strategic plan and success is underpinned by desirability and our ambition to enhance and grow our position as the most desirable motorcycle brand in the world.

Does our ability is our DNA.

Embedded in our vision is at the heart of our mission and it's part of all on an 18 year legacy.

Harley Davidson's desirability preserves the value of our customers purchases builds our brand beyond our riders issuers loyalty and drives engagement.

By designing engineering and advancing the most desirable motorcycles in the world reflected in quality innovation and craftsmanship rebuilding our legacy.

And building a lifestyle brand value for the motion reflected in every product and experience for riders and non riders alike. Desirability will continue to provide the framework for a hardware strategic plan and the framework for our success some issues.

I would now like to address a few specific highlights delivered against some of the hardware strategic priorities.

It's been a busy few months at Harley Davidson.

Aligned to our desirability and core product and category focus on touring and cruisers, we continue to see an increase in consumer appetite.

Non forward brand or <unk> motorcycles, and all other products.

The pandemic has provided a reminder of the power of getting outside reconnecting with the holiday with the community and the unique freedom and adventure that our brand represents.

We continue to experience significant demand for products and our brand with solid demand for our most profitable segments.

This improved product mixes, resulting in stronger year over year motorcycle segment margins and can be attributed directly to our desirability and rewire efforts.

This strong quarter underlines the increased strength of the market and developed brand in particular in the U S and Canada.

Meanwhile, we've continued to see demand in Europe and Asia. These regions are also being affected by both the enduring impacts of the pandemic and the wider global logistics challenges.

In line with the Hotwire I know a streamlined market strategy. We continue to maintain a long term focus on profitability and we are pleased with the initial outcomes as we continue to execute against this strategy.

Aligned with our focus on our core segments in April we launched our icons collection.

Produced only once these extraordinary adaptations of production motorcycles look toy story pasta and bright future.

We've seen a fantastic customer response to the first model the electric light revival with these limited serialized module selling out immediately.

The focus on selective expansion allows us to target segments that deliver balanced combination of volume margin and potential EBITDA.

Aligned with our brand capabilities and identity.

We are in these segments to win supported by the right allocation of time and energy balance with the right investments in product brand and go to market capabilities.

As highlighted at the last quarter, we've seen an exceptional response to our first adventure touring bike based on the revenue mix platform Pan America.

Following its very successful launch earlier this year.

Dealers and riders have been taking delivery of Pan American motorcycles, that's part of the sell out preorder allocation since may.

And the response from writers on and off the road has been overwhelmingly positive reinforcing our strategic loans within the adventure touring market.

We believe the opportunity within the adventure touring segment is significant not just in Europe, the largest adventure touring market in the world, but in North America, where the market remains a great opportunity and we are now using or power to grow it.

We believe that with Pan America, we are well placed to take market share in Europe and to become the number 1 model in this segment in North America.

With Pan America, we've seen outstanding sell through with initial run selling out globally.

Looking ahead, we see great potential to build on the success with Pan America and to target New riders in the adventure touring space.

But targeting new audiences, we will continue to look to further unlock a whole new dimension of customer.

Attunity for the company as we continue to grow our global market share in the adventure touring segment.

The success of Pan America reflects our focus and is an integral part of our hardware strategy of selective expansion.

We saw the potential built on our off road heritage and to compete and win in what we believe is the high growth and attractive margin segment of adventure touring.

Aligned to Hotwire, we will continue to strategically pick and compete in categories, where we see high potential with <unk>.

Clear path to winning.

On July 13th we launched the sports to exit our global reveal event from evolution to resolution.

Sports is not only 1 of the longest continuously produce motorcycles the history, but also 1 of the most iconic.

The sports the S is the latest all new motorcycles built on the revolutionary platform setting a new performance standards for the sports the loans.

The launch of this next generation sportster defined but power performance technology and stars reinforces our commitment to introduce motorcycles that align with our strategy to increase desirability and drive the vision and legacy of Harley Davidson.

The sports is equipped with a host of technologies designed to enhance the riding experience, including 3 pre programmed right modes, with which electronically controlled the performance characteristics of the motorcycle and the level of technology intervention.

The global reveal event generated over 127 million PR impressions with overwhelmingly positive sentiment with many publications surrounding the return of the iconic sports though.

We also saw 1 of the highest social engagement rates on our HD social channels. It is clear that riders around the world are excited for sports debt.

As we approach a week since launch we've seen exceptionally strong customer engagements with sports day with the highest leads generated for a new model in recent years.

We're excited about the potential of this spike and look forward to seeing it hit the streets. This fall.

As we continue to increase our customer focus we are also driving an updated product segmentation that better reflect our customers needs and preferences.

Our on driver combination of product heritage and innovation.

Sports to us would be the first motorcycle and the all new sport categories.

This category showcases how holiday is innovating and redefining cool motorcycle segments with unmatched Harley Davidson technology performance and style.

The touring category has been renamed Grand American touring the noting our legacy stronghold position in a key market segment.

Adventure touring will represent our entry into critical global segment, where we're competing to win.

Each of these segments along with other existing segments, such as cruises will build their own personalities and products further enhancing the customer appeal and relevance.

As part of the hardware strategy. We also made a commitment that Harley Davidson will lead in electric.

While we are clear that combustion remains the core for Harley Davidson business for the foreseeable future. We believe there is great potential for long term growth in electric vehicles.

Earlier this year, we announced our intention to launch a dedicated EV division to allow the strategic focus to deliver desirable growth in this high growth segment.

We recognize the pioneering spirit and brand value and life why on for community and took the decision to evolve the original library on motorcycle into dedicated EV brand.

On July 8 we presented the evolution of LIBOR as a standalone brand and the introduction of lives while 1.

The electric motorcycle built for the urban experience with the power and range to take you beyond.

With an MSRP at launch in the U S for $21999 pre any applicable tax credit we believe lifewire, 1 will redefine the segment through innovative engineering and digital capabilities and bringing a whole new generation of riders and non riders into our company's fold.

Innovating to win this quarter, our focus and that's the first OEM with a hybrid omni channel model Lifewire combines the best in digital and physical retail, allowing the customer to interact with our brands on their own terms.

We're launching online a lifeline dot com in a 12 month LIBOR on brand dealers in California, New York, and Texas replace geographic focus on EV customers and relevant charging infrastructure.

As this develops we plan to increase the physical lifewire footprint across the U S and the whole of North America.

We also plan to open our first LIBOR experienced gallery designed to facilitate a fully immersive brand experience and fall winter of this year in Malibu, California.

Our focus on the digital experience is aligned to the customer.

<unk> dot com, the new dedicated likewise, app and a new interactive bite builder present, a heightened ownership experience for the customer, including a digital path to purchase the first for the Lifewire Brian.

We've had a tremendous loans response to the new brand and building on the U S loans, we intend to take lifeline to international markets in 'twenty 2.

By investing in electric technology. It remains our intent to be at the forefront of innovation and development as we look to the EV segment.

We've always been about more than a machine and we believe our complementary businesses are huge opportunities for long term global growth of the holiday between brand.

Parts and accessories and general merchandise for part of the holiday to lifestyle and together with H DFS play a valuable role in our overall vision and mission and inspiring existing and new customers to discover the adventure that is uniquely Harley Davidson.

We believe there is great potential to grow our customer base, both with riders and non riders and to add to customer lifetime value shaping our future success as a global lifestyle brand.

Customization is a key part of our heritage in this quarter in parts and accessories, we have seen a strong performance despite substantial supply chain challenges.

We continue to develop and evolve our product offering as we work towards enhancing our leadership position as the definitive destination for authentic parts and accessories for our writers of both new and used Harley Davidson.

For many non writers general merchandise is the entry point to the brand.

We will be talking more about our HD lifestyle in the fall, but we are excited by the long term potential to leverage our brand value to invest in our on and offline retail channels and grow our general merchandise business globally.

For both parts and accessories and general merchandise light on Hotwire ambition, we continue to evaluate opportunities to redesign our supply chain and go to market capabilities to drive further efficiency and growth.

We also expect brand collaborations to be integral to our general merchandise strategy and allow us to leverage the unique and powerful brand, but as Harley Davidson.

Last week, we launched our first product calibration of the year with Jason No more in to Harley Davidson Museum is a limited production American made collection of 16 vintage inspired men's apparel and accessories styles sold exclusively on holiday because outcome and as our museum stool.

Jason's genuine passion for the brand reinforces how collaborations such as this 1 align with our hardware strategy to expand our complementary businesses with engaging products services and experiences.

The response from our community to this collection has been terrific and we expect full sell through of the collection in the coming days.

Last but not least building on the successful launch of HD certified last quarter. The first certified pre owned Harley Davidson motorcycle program ever we are excited to launch HD, 1 marketplace today on holidays and dot com the ultimate online destination for used Harley Davidson motorcycles in North America.

But blending the best of digital and in dealership experience HD, 1 marketplaces designed to facilitate a confident and seamless purchase journey for used Harley Davidson motorcycles.

For the first time in our history H D..1 marketplace will allow all Harley Davidson pre owned motorcycles, including HD certified bikes.

Every participating Harley Davidson dealer to be online in 1 place, making it eat making it easier for customers to find that unique pre owned motorcycle that they've been searching for.

All I repeat all qualified dealers have signed up to participate.

With financing provided by H DFS. Our goal is for HD, 1 marketplace to be the number 1 destination for anyone looking to buy a used Harley Davidson.

Additionally, customers will have the opportunity to sell their holiday, which is a record of HD dealer network through the selling my bike feature.

We believe the HD, 1 marketplace will drive connectivity and engagement with our holiday between customers and dealers acknowledging the important profit riders of pre owned Harley Davidson's play in our community.

The launch of HD..1 marketplace is also the first step in transforming HD dot com into the home of all things Harley Davidson.

From enhanced omni channel purchase experiences to unique community engagement.

Lots of content and learning on a global scale as we look to innovate on line to lead the industry.

Before we head to questions I'd like to summarize some of the highlights since we launched our new hardware strategy.

Following the new 21 motorcycles introduction, we successfully launched Pan America adventure touring bike.

We introduced HD certified our first ever pre owned program.

We launched our icons collection with electric light revival selling out instantly.

We created a new EV division and stood up life wires and independent EV brand with lightweight 1 as its first product.

We launched sports the S. The evolution of the iconic sports as part of the reclassification of our overall market segmentation.

And today, we introduced HD number 1 marketplace the ultimate digital destination for pre owned Harley Davidson motorcycles in North America.

We delivered strong Q2, and first half financial performance, despite the unprecedented pandemic related supply and logistics challenges in this sector.

We expect these challenges to continue and recognize the potential associated risks to our business for the remainder of the year.

I'll, let David so as a brand with global recognition on appeal with 118 years of uninterrupted heritage of craftsmanship and unrivaled iconic design, we are truly unique.

We believe there is tremendous potential for our brand and business globally, and we will not rest on prudent until we have the best in class in every market we compete in.

Thank you for your time this morning now let's take your questions.

In order to ask a question. Please press star 1 on your telephone keypad could be placed into the queue. We ask that to limit yourself to 1 question. If you have any further questions. Please press star 1 again to re enter the queue.

And your first question comes from the line as Jamie Katz with Morningstar. Your line is open you may ask your question.

Hi, good morning, nice quarter. Thanks for taking my questions I'm, hoping that you guys can elaborate a little bit more on specific supply chain issues and maybe how you see those playing out over the remainder of the year since that's something that we're seeing across a number of industries.

And how do you feel you have positioned yourself defensively Tim.

Tim maybe mitigate some of those expenses. Thanks.

Okay.

Thank you Jamie.

As I mentioned the supply chain challenges are manifold theyre not just.

Just 1 issue they pop up and they go away, but the team has done a really extraordinary job to mitigate any significant outages, so far but it's not something that you can predict will continue at this point.

We are managing this situation on a daily basis. The impacts obviously include shipping delays.

Both inbound and outbound freight.

Because of length on shipping lead times, which as you've seen has also affected our sales, especially in the in the European and Asian regions, we see congested ports shipping container shortages volatility and schedules and receiving.

And obviously.

The highly publicized semiconductor chip shortages. So all of those are challenges that.

<unk> us and affect our suppliers, but so far so good we have not seen any significant blackouts in our factories, we had to sometimes move models around because we had shortages on the particular bike are what we call a brown outs through material availability that got it.

The short term, but overall, we've been really able to stable force all stopped situations or blackout at this point.

You highlighted that this is a risk because it is at risk.

That will continue we hope we can mitigate those risks as we have done successfully on the first half, but obviously, we talked give any guarantees at this point, we feel good about what's coming but but recognize that.

Shortages.

They they solve themselves very often in the last minute.

With her.

Going into the next quarter shortages with its semiconductor conductors or other supply that Oh, you know present, the big a big potential risk and then we managed to close the risks thanks to the support of our suppliers and the great work that the team is doing.

I hope it on okay great.

Yes, and then can you maybe just frame how you expect shipments for adventure touring too on Pan out over the rest of the year.

If there was on maybe some pull forward at the initial launch and then that levels out over time or if should the cadence of shipments may be remains around this level going forward. Thanks.

Well the majority of the bikes, we have shipped now in the second quarter and I'm pleased to say that we've actually achieved the goals that we've set force of long term.

By being the number 1 selling adventure touring model in the U S. In the month of May and June already which is an extraordinary result, we've grown this segment and we've become number 1 in a short period of time, we will try and ship as many models as we can but the majority of the shipments have already happened in the in the second quarter.

And then bear in mind that in the fourth quarter is the quarter when we will now.

Switch over to the new model year, so that and our.

Our guidance for the fourth quarter and before the second half.

Thank you that's very helpful.

And your next question from James Hardiman with.

Wedbush Your line is open.

Yeah.

Hey, good morning, Thanks for taking my call and.

Congrats on your books whoever whoever over there.

Our fans are obviously, a big big big win for the city.

So.

What was likely a surprise to nobody I wanted to ask about inventory.

I think the expectation was to build inventories in the second quarter.

And if that was going to be the peak for the year and then you draw down excuse.

Seasonally during the back half of the year, obviously, the reverse was the case.

And we're basically sitting at that 13000 domestic unit level, but where we started the year. So I guess the question is.

Does that sort of push inventories out or replenishment out into the second half or are you comfortable with with that 13000 unit number and I mean, I guess, the implication would be that you would finish that even even less than that.

If we continue to see that seasonal drawdown during the back half.

Thanks, James and thank you very much for your comments about the box obviously is a Milwaukee headquarter company with 118 years of history. We are we are very excited and the 1 on also congratulate are as a company to the box for this phenomenal victories last night as you can imagine it's been a big celebration of all over.

So thank you box for making US a you made us truly proud in terms of your inventory question.

As you rightly state that inventory levels are lower than we had originally planned.

Due to stronger retail demand.

And we expect that to continue throughout the year and normalized inventory levels, we will be planning for in 'twenty..2 it's unlikely that we were able to achieve a the.

The inventory levels that we originally planning for the year already this year or in the second half.

That said, while the ideal inventory levels from our planning.

Hum.

We would have wanted to see higher we believe that the lower inventory levels have helped on the other hand also to increase the desirability of our motorcycles and our customers.

Actually waiting for deliveries are choosing to purchase.

Bites at a later stage when the inventory comes in so it's hard to say if that has an impact on sales.

But overall I think our dealers and our customers being willing to wait.

We were able to mitigate the lower inventory levels that said, we would have liked them to be higher but due to the situation.

But this particular supply chain related to that was impossible and we don't anticipate that happening in the second half either because we're going to sell what we make essentially.

Got it that's really helpful and maybe just a real quick clarification, Gina the slide that talked about the second half.

Margin expectation the difference between Q1 and Q2 is just that that Q2 was a GAAP number includes the EU tariffs are or are there any other differences there no. That's right. When we when we put this slide in front of you last quarter. The EU tariffs weren't certain or we were still kind of holding that out of it it could it could not happen.

Now that we have more certainty. This represents our GAAP guidance, that's right got it and so flat excluding tariffs flooded.

Flattish still got it okay. Thanks, guys.

And your next question comes from Greg British Canyon.

With Wolfe Research your line is open.

Hey, guys. Good morning, it's actually Fred Wightman on for Greg I'm wondering if you could just talk about pricing, it's still a relatively modest benefit in the quarter. I know you talked about that 2% price and that took hold earlier. This month, but can you talk about how you got to that 2% number if theres been any pushback from dealers or customers. So far and just how you see pricing as a lever going forward.

Yeah.

Okay.

We have not seen any pushback, obviously, it's early days, but overall I think the market understands and dealers and customers understand that we needed to pass on some of the price increases on the price pressures, we're seeing in the market.

So we've not make it just made a decision as to 'twenty 2 more on your yet and what impact that might have on pricing, but we feel that the 2% increase is is it good.

It's a good step forward bearing in mind that we have also continued to streamline our our model.

SKU count and we're able to take on some less profitable bikes are in the process, which overall would take the average retail price up or for the company as well.

So that's sort of happened.

In the background. So 222 measures that we took for the second half further streamlining of our product line and 2%.

Great and then just quickly on Pan America anything you can share as far as data you have domestically for.

Incremental customers on new customer ensuring that category per se share gains and then how is that informing your thoughts about the international opportunity.

Yeah, we don't have a detailed customer data available yet.

Based on what I've heard you could certainly say that the Pan American has brought new customers into the fold in addition to getting existing holiday.

<unk> to buy a new motorcycle from from holiday bids and so it's certainly attractive new customers. The reviews have been phenomenal in the adventure touring a world, which which as you know I'm very excited about and that's definitely attractive to move customer group that we didn't have because it is a new segment for us.

I'd say overall, it's been.

You know very balance new customers coming into the brand to Dubai adventure touring bike and and existing customers being excited about it as well.

And that approach to for the U S and international in particular.

Great. Thank you.

And your next question canvas from Carrie Johnson with BMO capital markets. Your line is open.

Great. Thank you I'll try to keep this 1 long question, it's about a lot of water on the rebranding and how that's going to work.

Who would you distribute live wire to will be Harley Davidson dealers exclusive dealers for wildfire or power sports dealers.

You know what about signing that she's picturing out those dealerships if they happen to be Harley dealership. Since this is a separate brand.

And then my last part is on what happens to those dealers, who last year investors, who are not getting wide wire now who invested in charging stations lifts all that sort of stuff. Thank you.

Thanks, Gary well, we actually compensated our dealers for this structural investments such as charging.

Stations in the fourth quarter of last year already so all the dealers that are whether they have life way or not.

Going forward has been compensated for the investments that took place in the fourth quarter of last year.

In terms of distribution, we have 12 dealerships in 3 states that are currently selling life why are they will all get.

Special assignments on fixed string a in the near future. If they haven't received it already so we want to make sure that the Standalone brand has also presented as a standalone brand, but it is these are all qualified holiday with some dealers that are now qualifying to become.

Have qualified to become lightweight dealers as well so likewise, the new line make of Harley Davidson company.

We'll be rolling out our distribution to additional dealers throughout the country over the next 12 months. So you can expect that those who qualify.

For life why are will represent the brand the new brand in the U S and the rollout as I've mentioned earlier, we'll then happened internationally in 'twenty, 2 but overall, it's our our dealers.

The dealers how the dealers that are qualified.

Based on the specifics of the Lifeway brand to go after that.

More urban oriented consumer to represent lifeway as a second brand.

Okay can I just ask about qualification and how do you qualify do you have to be an urban dealer or do you have to be a large dealer what sorts of qualification status.

There are several criteria that are that you have to fulfill but first of all you have to have a person for electric so if you're a dealer that believes in the future of electric and likewise the brand than we are with that's the starting point for our discussion and and and and and we welcome any any dealer that is.

Interested in representing lifestyle and then you know you have a whole list of things obviously, we're taking the omni channel approach.

It's a different type.

<unk> way of selling the bike.

Targeting a different consumer so as a as a dealer you have to make sure that you're able to to reach a new consumer group that might not be the traditional core of the <unk>.

Davidson consumer on brand and so it's a long list of qualification criteria that are that are necessary to make sure that the day, let become successful with like oil.

Okay fair enough. Thank you very much on.

And your next question comes from Craig Kennison with Baird. Your line is open.

Hey, good morning, Thanks for taking my questions as well they relate to HD, 1 marketplace, which launched today.

Mostly I just want to understand that model better.

What is the economic model for Harley Davidson for example will you earn any lifting or transaction.

And who are your competitors in that marketplace and how would you frame the Tam if you can.

Well as I mentioned last year early on I said, we need to really get our hands around the us solid.

Harley Davidson.

Bike market and we've never really had.

<unk> much visibility, it's always been a significant business for our dealers but.

The motor company never really had a good understanding on.

On on the used bike market. It's a significant market those are all very valued hardly customers and it was important for us to get our hands around debt market.

First step that is really important we are offering that listing services for free because we believe scale is critical and it's a service for our dealers at this point.

And we're very pleased that we will be starting our HD number 1 marketplace with over 18000 bikes as of today, which is quite extraordinary considering that this is a new initiative all our holiday and some dealers have signed up and I think that goes to show the power of this new marketplace and and the excitement that the debt we are building throughout the day.

Net working I also think for consumer so it will give us valuable insights and leads a lead generation is critical.

We of course want to sell used bikes.

For our dealers they are selling them, but they are listing them on our side, but that's an opportunity to then expand HD marketplace and also make sure that our.

Our business is like general merchandise on parts and accessories prosper in the long run as well and as I mentioned.

We will start with the with the entire selection of pre on Harley Davidson and <unk> and the goal is really to make HD dot com the goto side for anything Harley Davidson. So this is this is the first big step in digital push from holiday that is.

Absolutely necessary to get our hands around new customers and existing customers and bring them into the fold or keep them within the ecosystem of Harley Davidson.

Thanks in terms of how you monetize other transaction fee opportunities or each DFS opportunities through that ecosystem. Yeah. It's definitely H D. S. S plays an important role on it.

When you go go on on line you will see that HD vest is obviously the preferred to for financing debt bike.

Certified as the second opportunity that is great for dealers and also good for the motor company. So those are immediate opportunities from a financial point of view and that would be certainly more in the future, but right. Now scale is critical digital is all about scale and you talked about or asked about competitors.

So I could try to there's a ramp it on but we will our goal is very clear we want to be the number 1 and we will be number 1 very quickly in terms of the extent of used bikes that are that would be available online and certainly nobody can match or dealer network and having the dealer network supporting this initiative is a big win for us.

And your next question comes from Shawn Collins with Citigroup. Your line is open.

Yeah, great. Thank you good morning <unk> team.

My question is on on it.

Current input cost pressures that you are seeing just wanted to ask if you could kind of talk in terms of where.

Where youre seeing the most increased costs, whether it's steel or aluminum or resin products and and maybe from a quantitative standpoint does this does your recent 2% price increase does that fully or partially mitigate some of these pressures any context might be helpful. Thanks.

Sure, where we're seeing it is primarily in the aluminum in steel markets on lumber is actually up settling down a little bit that lumber within the quarter was up as well and.

And we are continuing that forecast as we look out to the back half of the air we see elevated rates in the back half so that 2% surcharge will not completely on fat, but we're seeing come at us but it.

It will be a good good party on offsetting much of that in.

In terms of on impact within the quarter and you as you think about the margin change the raw material.

The increase was worth about 2 points of margin. So it was fairly fairly material and then you add on top of that all of the logistics right inflation that we're seeing that was roughly another 3 points of margin. So those headwinds that are coming at US you know roughly 5 points of margin within the quarter.

And your next question comes from Robby <unk> with Bank of America. Your line is open.

Hey, Thanks for taking my question actually I had just wanted to clarify a few things I think first just on the on the way the shipments have played out.

Do you guys expect the third quarter to be constrained similarly, or is there any kind of catch up with all those preorders and maybe related to that any color you can give us on how you view how the competition is handling the shortages and does that are you benefiting from that and kind of how do you think things.

We'll play out as these supply chain challenges.

Get resolved as we move through the rest of the year.

In terms of shipments I mean, the guidance that we've given pretty much reflects what we expect in terms of when our product land in the market. So we've seen some delays in the first quarter going into the second quarter and we've seen delays in the second quarter going into the third quarter.

No.

In particular in the European region, we expect to catch up in the third quarter. Obviously, we also don't want to come too late in the year considering.

Riding season, especially in Europe would come to an end.

In October.

That debt bearing debt in mind predicting shipments, there's not an easy thing because quite often now ships on stopping where they're not supposed to stop and what usually was $43.40 day timeline doublets and sometimes ship just stopped ships just take additional 2 stops and then the product that you expect to hit in a quarter doesn't.

Because of these additional delays that the shippers are essentially.

As you know.

A lot of not allowing us to deliver the product in time due to the ships arriving later than originally scheduled and that has also been a problem that we've been facing with so there's a lot of flexibility required to really get the.

<unk> because the plant doesn't always materialize, especially when you when you would need to hit a quota that said we.

Taking any expedited.

Shipments just to make the quarter or whether the product comes in in July or it comes in in June doesn't really matter to us obviously administer our customers, but the quarter is not relevant for them. So we could we will offload as quickly as we can in order to ship and some of that will happen in the third quarter with delays, we've seen particularly on the second quarter.

It has affected our competition.

It's very difficult to say.

Wouldn't say that we have gained a competitive disadvantage from what I've seen and I think everyone is facing similar problems.

But you know you'd have to ask them really I'm not sure I think we've done exceptionally well all things considered and we hope we can keep that going also into the second half.

And your next question comes from Joseph Spak with RBC Capital. Your line is open.

Thank you Matt.

First just a quick housekeeping on a bigger picture strategic question on the raw material and logistics. So you mentioned the 5 basis point headwind this quarter.

Is that a good run rate for the back half or does it actually step up because you know you've lowered your youre sort of back half guidance by sort of mid single digits and then Jean.

I'm on.

I'm paraphrasing here, but you sort of mentioned that you guys realized.

Lower inventories you into deals can be more profitable.

So I'm wondering like do you think that's just a.

'twenty, 1 dynamic or are you changing your longer term strategy to run leaner than maybe you were thinking prior and if it is the ladder how should investors think about what the right level is that dealers to hold you accountable for that.

Yeah.

Okay sure good questions. So on the raw material from a freight standpoint, the run rate that we've seen within Q2.

For the most part holds in Q3 and Q4 on the raw material inflation. There is a bit of a step up in the back half of the year, which again coincides with the the pricing surcharge in that and the timing of when we were taking Matt so that both kind of on the freight inflation for the back half as well as the step up on raw materials that is incorporated.

And into the back half guidance.

That we have given so and remember that the back half guidance going down kind of at that low single digits mid single digits.

We havent slide 14 that was really driven by the EU tariffs and incorporating that into the GAAP guidance.

So that that kind of I think answers. The first question on the second 1 on the long term strategy with inventory.

It has absolutely helped to build the desirability, we're seeing that play through in our pricing, but we also recognize we're not where we need to be from an inventory standpoint. So we are absolutely learning a lot of of how we can manage within these these tighter inventory levels, but I think as we move throughout Q2, I'm sorry with your 'twenty.

'twenty 'twenty 2.

See us try to build back to more optimal.

Inventory levels.

And your next question comes from David Macgregor.

With Longbow Research your line is open.

Yeah. Thanks for squeezing me in I guess, just a question on pricing and you talked about the raw materials on the logistics, but.

Just thinking through some of the channel checks. We did this quarter there were a lot of bikes sold above MSRP.

And I'm just wondering given the.

Raw material inflation, so logistics issues all the things you discussed do you have an opportunity to recover that inflation more rapidly in 2022, and then what you're seeing here with the 2 per cent surcharge in the second half.

While we are watching MSRP very carefully and while some bikes or have a go on the buffet MSRP overall.

Great to see that our dealers are not charging significantly the buffet MSRP.

There's been 1 particular.

Category, where MSRP was high on beef adjusted the price for that product that is above and beyond the 2 per cent.

Jobs that we are taking so I think we've taken the measures that we can but overall, we are trading at or slightly profit MSRP, but no significant significant sales are made.

A significant amount of profit msft, which from a customer point.

A view I think is very important.

You don't want anybody to take advantage situation and on the customer gets unhappy because they're being charged a buffet ends up being I'm very grateful that our dealers are more.

Path respecting debt. So we haven't seen a significant significant sales happening in profit MSRP, except in a couple of products, where we've made some adjustments.

That said as I mentioned earlier 22 model year, we're certainly looking at it overall.

A combination of raw material price increases shipping everything that we need to bear in mind terrorists potentially those will all play into our into consideration when we decided on R 22 modern day pricing.

And your next question comes from Joe Alto Bello with Raymond James Your line is open.

Great. Thanks for taking my question. Good morning couple of questions on the EU tariff situation.

First out of 31 per cent rate I assume you guys are not profitable in Europe I wanted to confirm that and secondly, what steps are you taking to mitigate that or do you want to wait and see how negotiations play out before making any drastic changes.

So your business model in Europe.

If it does go to a 56 per cent how would you respond to that hypothetically.

Yeah look you you to adjust pricing to mitigate all of those.

31%.

Unrealistic, because you essentially price yourself out of the market. So that's not something we want to do we were in Europe for the long haul. This is important for dealers for our customers as well.

We think that the terrorists at least we will have a clear answer before the end of the year. If they will continue or not we certainly are relatively positive, but something will happen because if you look at the overall steel and aluminum tariffs they don't really make much sense considering that the both.

Uh huh.

Sky high level and that just fuels inflation that I don't think anybody wants to see in addition to the fact that Harley Davidson has been singled out with with terrorists as while we pay terrorists going for bites going into Europe, our European competitors don't pay tariffs or very low terrorism.

3% selling into the U S. That's not sustainable that's not right.

Simply unfair and all of these things we believe need to go away and will go away eventually but.

We think that we need to obviously take it into consideration for 'twenty, 2 but hope to get a resolution on beef.

Before we have to finalize on pricing that said, we will not be able to pass on price increases shoot the terrorists persist also going into 'twenty, 2 we're not commenting on regional profitability.

Hope you understand them, but we certainly see a lot of potential in Europe with or without tariffs.

And your next question comes from Billy Cavani Suite of Morgan Stanley. Your line is open.

Thank you Luke on on why you've recently taken some action to carve out the Brian given your life in the new model Y on Y 1 more affordable price point looks great. Just the question here is like what's the incremental spend required in evs in terms of the development cost capex branding R&D hiring more people.

Et cetera, and how some of the sort of expense given the previous livewire launches. Thank you.

Yeah, we're not.

Breaking out our SG&A for 4 life why at this point the business model. We obviously are working on now and we will be able to comment on debt and in future quarters.

We have increased our spend on on on electric motorcycles overall, and we are standing up a separate division. We believe it's the right thing to do.

And hiring the right talent in order to really win in electric is necessary. So we are increasing our assets in that space.

But we're not breaking out with our SG&A, but what you've some of the incremental spend you've already seen.

In Q2 and that will continue in the next couple of quarters as well, but we'll give more.

Color to that in future quarters.

And that concludes the Q&A session of today's call I'll hand, the call back to Shannon Burns.

Alright. Thanks, everyone. We appreciate your interest in Harley Davidson and hope you all have a fantastic day.

Thank you Doc inclusive. These conference. Thank you all for joining you may now disconnect.

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