Q3 2021 Harley-Davidson Inc Earnings Call

Thank you for standing by and welcome to the two N P 21 third quarter Investor and Analyst Conference call.

At this time all participants are in a listen only mode.

After the speaker's presentation, there will be a question and answer session.

To ask a question during the session you will need to press star one on your telephone.

We used to be advice at today's conference is being recorded.

And they forget assistance. Please press star Zero I would now like to hand, the conference over to your Speaker today, Mr. Sean Collins. Thank you. Please go ahead Sir.

Thank you good morning.

Everyone.

This is Shawn Collins, the new director of Investor Relations at Harley Davidson.

You can access the slides supporting today's call on the Internet at Investor Doc Harley Davidson Dotcom.

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 SEC Harley Davidson disclaims any obligation to update information in this call joint.

Joining me. This morning are CEO yoga tights, and CFO Dziennik Theater. In addition, chief commercial Officer, Adele, who Sullivan, who joined for the Q&A.

With that Yoking why don't we get started.

Thank you Shawn and welcome to the team.

I also want to thank Shannon Burns place great work in Investor relations over the past three years as he moves to a new finance role as part of our Lightwave Division.

Good morning, everyone and thank you for joining us today.

We delivered a solid quarter and are pleased with our year to date performance.

Many proof points that our hotwire strategic initiatives, that's sucking up a solid foundation for future growth at Harley Davidson.

It's part of the Hotwire strategy, we would need to focus on profitably driving our core business.

2021 we've been encouraged by the recovery of the drilling market.

Bank of America to insist that the cobalt mission and our brand.

We are committed to defending and expanding our share in this segment and see potential for future growth.

But you are actively targeting high potential category, such as adventure touring with the kind of America sports with sports bets. We also maintained our focus on long term profitability potential.

<unk> branded product capabilities.

The increased demand.

Both our core and expanding categories.

Of course, the momentum throughout the holiday brand and all its been spoiled because she.

An adventure.

We've also seen interest increasing culturally right as the market increases the participation in the holiday riding Academy.

But we've seen riding academy participation and completion increased 20% over 2019.

In addition to what strategic changes as part of us being in that market strategy locker headwinds, including a variety of challenges from supply chain shortages to congestion at ports and increased shipping funds that's been impacting all production in Iowa.

Supplies in Q3, and particularly in our international markets.

While the supply challenges are likely to continue into 2022.

<unk> committed to managing the effects of a disruption leveraging that scale across the global network and infrastructure to mitigate the impact on our business.

That said I'm very excited about the global potential of holidays with Brian in the coming years.

And as we focus on more profitable motorcycle unit as part of our strategy. We continue our journey towards a more efficient use of inventory.

While we are below our intended inventory strategy, we've seen our dealer community that's improved the profitability and therefore improve the overall health of that network.

I now hand over to Jim to provide more details on our financial performance for the quarter and year to date.

Yeah.

Thank you, Ken and Hello, everyone.

Third quarter results reflect continued demand momentum as evidenced by our strong wholesale unit growth and share performance across your market.

As Hilton said, we did experience increased supplier volatility, which impacted our production and supply levels for the quarter. Despite.

Despite this our financial results demonstrate our agility and maximizing profitability, including the execution of a pricing surcharge in the U S optimizing production schedules to prioritize our most profitable models in market.

And enacting tighter operating expense controls.

In the quarter total revenue of $1 $4 billion were 17% ahead of last year behind increased shipments and favorable motorcycle unit mix, primarily driven by the actions undertaken as part of the rewire.

Total operating income of $204 million was ahead of last year with growth across both of our reporting segments.

The motorcycle segment, which includes our general merchandise and parts and accessories products deliver at $98 million of operating income, which is $51 million better than last year.

And the financial services segment delivered $107 million of operating income, which is $15 million better than last year.

Third quarter GAAP earnings per share of $1 578 turns better than last year are up 35% year over year.

When adjusting to exclude the impact of EU tariffs and restructuring charges, our adjusted EPS was $1 18, and up 12% year over year.

Turning to Q3 year to date results revenue of $4 $3 billion is 30% ahead of 2020 and operating income of $831 million with $701 million ahead of last year.

Year to date results reflect the strong unit growth over the pandemic and that impacted results in 2020 as well as the positive impact from last year's Rewire actions.

GAAP year to date earnings per share was $4.06 up 342 from a year ago, while adjusted earnings per share was 429 up three tenths from last year.

Global retail sales of new motorcycles were down 6% in the quarter with growth in North America offset by declines in our international markets.

North America Q3, retail sales were up 2% versus last year, driven primarily by 5% growth in Grand American touring our most profitable segment.

The successful launches of Pan American sports dress Pant.

Pan American maintained its status as the number one selling adventure touring model in the U S and since launch earlier this year, capturing a 16% market share in the third quarter and a rapidly growing adventure touring segment.

And after much anticipation beyond these sports dress motorcycles began shipping to dealers late in Q3, and we have seen very strong sell through today.

In our international markets. The retail sales declines were primarily driven by the actions taken during required to exit markets and prune unprofitable My model.

EMEA and APAC sales were disproportionately impacted by the decision to exit the unprofitable streets and legacy Sportster bikes and in Latam the declines from the motto pruning and market exits were accompanied by pricing actions taken across select model.

Through these actions the laws haven't region has improved their profitability, which we expect will set up a solid foundation for future growth.

Worldwide retail inventory of new motorcycles was down at 35% versus last year and relatively flat to the previous quarter Q3 inventory has been impacted by stronger demand in the U S as well as supplier challenges, which impacted our ability to produce at planned levels.

While inventory levels are lower than our original plan, we have seen improvement in desirability as measured by stronger pricing dynamics across both new and used motorcycles and strong dealer profitability.

International markets continued to be impacted more profoundly by global transport challenges, which resulted in higher costs and longer ship times to keep ports.

Looking at revenue total motorcycles segment revenue was up 20% in Q3 and up.

36% on a year to date basis.

Focusing on current quarter activity nine points of growth came from higher year over year volume for motorcycle units, including a new Pan America and sports dress motorcycles.

Eight points of growth from mix driven by a larger percentage of touring bikes in the quarter and reductions across legacy Sportster and street.

Two points of growth from pricing and incentives and during the quarter, we increased the pricing surcharge in the U S from an average of 2% taken in Q2 to three 5% to partially offset raw material inflation.

And finally, one point of growth from foreign exchange.

Q3 gross margin percent of $26 seven was down three percentage points versus prior year, a margin benefit from stronger volume profitable profitable mix and pricing was more than offset by the negative cost headwinds across the supply chain and higher EU tariffs.

Q3 operating margin finished at eight 4% and was up three six percentage points over the prior year.

Positive margin benefit from volume mix pricing and reduced restructuring expense was able to offset the negative gross margin drivers already noted.

Year to date operating margin is significantly ahead of last year, given the COVID-19 impact and it is also a 4.6 points ahead of 2019.

Despite absolute unit declined versus 2019 profit per unit has increased behind it stronger mix pricing lower incentives and an overall lower cost structure. These results validate the efforts that we took during the rewire and have set up a more profitable foundation for future growth.

As mentioned previously the global supply chain remains volatile not only for our business, but across the global manufacturing sector. Our team has continued to do a great job navigating through the unprecedented challenges and demonstrating agility in managing production schedules to optimize output.

We have continued to see increasing inflation within raw materials and automotive freight and we are forecasting this to continue at least through the balance of the year.

To help provide additional insight into the supply chain five nine provides detail on our cost of sales mix as well as the estimated inflation impact across the major components.

As you can see logistics costs began to increase early in the year and peaked in Q2 at two and a half times higher prior year costs before settling down a bit in Q3 at two times prior year.

Q3 was better than Q2, as we move past the cost incurred with our three PL conversion in North America.

Materials and components cost inflation accelerated through the third quarter, where we experienced a 6% to 7% increase versus last year. This includes the cost of raw materials and higher cost of purchase components.

And finally manufacturing inflation, which includes the labor cost has been relatively consistent throughout the year at 3%.

We're forecasting continued inflation pressure across all three buckets in the fourth quarter at similar levels to what we've seen in Q3.

The financial services segment operating income in Q3 was $107 million up $15 million compared to last year, primarily driven by $23 million of interest expense favorability.

H DFS is retail credit loss ratio remain historically low at 0.84%, a 56 basis point improvement over last year.

Overall retail delinquency rates had been favorably impacted by improved economic conditions and the benefits provided to individuals' under the federal stimulus packages earlier this year.

Delinquency rates have continued to run much lower than pre pandemic historic levels and while we do expect delinquency rates to normalize over time, we believe losses will continue to remain lower in the short term.

Looking at H Dfs's based fitness retail originations in Q3 were up 13% versus last year behind strong new and used motorcycle origination volume.

As a result, and then retail finance receivables in Q3 were $6 $7 billion, which is up two 2% from last year.

In addition, the retail allowance for credit losses at the end of Q3 was five 1%, which is flat sequentially and down from five 9% at the end of Q3 last year.

A year ago the year.

The U S economy was restrained by the pandemic and this is reflected in a higher allowance rate.

While today's allowance rate has improved versus the peaks of 2020. It is still above pre pandemic levels. Given the continued uncertainties surrounding the pace of economic recovery.

Wrapping up with Harley Davidson, Inc. Financial results, we delivered year to date operating cash flow of $926 million down $210 million from the year over year period. The key driver of unfavorable cash flow with an increase in wholesale finance receivable originations.

Total cash and cash equivalents ended the quarter at $2 $1 billion, which is $1 $5 billion lower than Q3 last year as we worked down higher cash balances 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%.

We are also maintaining our GAAP motorcycles segment operating income margin guidance of 6% to 8%, which is inclusive of the full impact of the incremental EU tariffs and the supply chain inflation laid out earlier.

Our estimated U S tariff impact for 2020, 2021 has been adjusted to approximately $64 million in line with our unit forecast.

We are lowering our capital expenditures guidance to a $135 million to $150 million from the previously communicated range of 190 to 220.

They're spending changes driven by tighter cash management across projects as well as changes in the cash flow phasing across key initiatives.

And lastly, we are increasing the financial services segment operating income growth guidance to 95% to 105%, which is an increase from the previously communicated range of 75% to 85%.

The improved outlook takes into account the year to date loss favorability. The reserve releases early in the in the year and our outlook for Q4.

Cash allocation priorities remain to first fund growth through the hardware initiative than to pay dividends and the company may also choose to execute discretionary share repurchases in 2021 and 2022.

As we look ahead to the fourth quarter on Slide 14, there are a few known and expected factors to consider regarding our revenue and profitability.

First as we've discussed we will be shifting our motorcycle production in the middle of the quarter to begin producing the 2022 model year product.

While we will continue to run the plants. This dynamic will limit the amount of wholesale shipments and revenue during the fourth quarter as bike built will go into company owned inventory ahead of the model year launch.

We expect the financial impact to look very similar to the impact we saw last year in Q4.

Other Q4 factors include higher expected expense and capital spending to support upcoming launches and marketing campaigns.

And as we previously mentioned, we also expect to see supply chain inflation consistent with what we experienced in Q3.

This will be slightly offset by lower Q4 restructuring spending versus last year restructuring charges in Q4, 2021 will not be material and we no longer plan to spend the $20 million full year estimate mentioned in previous quarters.

At this point 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 we pursue our hotwire goes we continue to do it in the hands of our organization and processes focusing on the alignment and deficiency.

Underpinned by guys to win as a team which is the basis for our culture. We will look to ensure that Harley Davidson as a company as a brand is getting stronger than ever and is positioned for long term success.

Well I think let's go through the whole holiday team for all their hard work.

By designing engineering and theater, but most of the talk with motorcycles in the world with such a great quality innovation and craftsmanship. We continue to further our legacy as the only American motorcycle brands with 118 years of uninterrupted heritage.

As you know desired ability provides the framework for our hotwire strategic plan, our five year roadmap to both enhance and grow our position as the most of the job with motorcycle brand in the world.

It's our ability not only impacts those neutral with schools and our brand, but also a dedicated couldn't material riders and non riders alike.

As we recognize the post pandemic conversations around the sport Motorcycling have changed the most.

You're right our base that has a desire to escape.

The outdoors and rediscover Pepsico garden.

All of which.

Squarely in the holiday submission of delivering free to put this all in the pursuit of adventure.

It's our ability to also a motivating factor for getting people into the sport.

We know there are plenty of people who are interested in writing, but more importantly interested in riding Harley Davidson.

So how the Davidson riding Academy is an important way in which would be a ridership and deepen our connection with our customers.

Targeted focused in North America, we have plans to take the HD riding Academy to high potential markets across the world, including China, where do you see a high potential to leverage our brands and introduce new ideas to the schools.

We also are mindful of the need to provide us to hold their writing skills as part of their journey in pursuit of adventure.

This offering the holiday so why did it go to me they of course the adventure touring large of course was specifically designed to offering to complement the old Pan American motorcycle.

This course, which we're planning to expand strategically over time as the perfect experience for new and existing adventure touring why this offering the skills and knowledge to get more out of the off road experience, while prioritizing the safety.

With improved market conditions, we see a growing consumer appetite for our brand and our iconic motorcycles, including the new products launched this year.

Since launching hotwire, we've experienced strong demand for our products and our brands the demand that we're seeing within our strongest and most profitable segments.

Despite the continued impact of the content related supply chain challenges, we can see the potential of our screen like market strategy as we maintain a long term focus on profitable growth in line with our hot water dishes.

As we continue to execute against our strategy of 17, 20 thing skewed towards the us Billboard segments, a truly large cruiser and strike, we really guided by our commitment to critical conditions.

Profitable segments.

Boggy, Boston potential exactly aligned to our brand capabilities with a clear path to membership.

At least.

We work hard to continue to solidify and grow our position as leaders.

These segments are the most attractive is the global market in terms of our profit focus.

Another component of the Hotwire electrics expense.

Focus on selective expansion also allows us to call. The second study live a balanced combination of volume margin and growth potential that are aligned with our brand capabilities and I did too.

Again were empty segments supported by the right allocation of strong energy.

With the right investments in product brand and go to market capabilities.

And probably this year, we launched our first adventure touring motorcycles Pan America.

Taking inspiration from our heritage we wanted to create a motorcycle that redefined the category.

And America is squarely built in our mission to deliver adventure called ride us pulling it off the road.

Performance at the Pan American has recently been demonstrated by a group of writers, who which there's so much of what she left us in the Himalayas, the highest unpaid multiple wrote in the world with some 18600 feet phase.

The coast for holidays.

This quarter saw the Pan America to about 60, especially become the number one selling a bunch of model in the United States.

But we are very proud of.

We believe we will continue to grow the category in North America, and the potential of the Pan America across the World is significant.

For example, the North America other category accounts for 5% of the overall market has grown 51% since 2017.

When you look to Europe adventure touring currently represents 33% of the motorcycle market as a whole rose 33% since 2018, and we believe it's continuing to grow.

We see a great opportunity to build on the success of Pan America in the first six months Lockett's look to Europe and further afield.

We saw that new holiday so why this venture for your expertise.

In July we also launched the latest information of the iconic sports the sports openly be really bad.

Building on our resolution next basketball and sportswear and set a new performance standard for the long history of Houston extraordinary they'll come into market.

You get a response to the schools. So it's been exceptionally positive reviews, including motorcycles comprising of evolution.

Craig with motorcycle engine.

Yes.

Calling out the bike as a pillar holiday that speeds cool.

But last year was so one of the largest engagement rates on our holiday the social channels.

We're pleased to see this excitement translating into orders.

This allocation being sold out through our integrated suite.

Oh the system.

With our preorder system or you guys are able to effectively create integrated reservation system.

Direct line of communication allows us to work through manufacturing locations and improves the overall.

Ability on autos.

Q4, this year holiday window fishing with only the reservation process in the U S and Canada to capture early demand with select 2022 models.

This process will provide a consistent experience both holiday because you'll come in at the dealership network.

Units to engage with customers, particularly in customizing the new motorcycles.

You can notify them when they expect liberally that'd be for future enhancements that strengthen and support the holidays could be with you along the road.

With our ambitious with our customer at the forefront of everything we do.

One two hour Hotwire goes like this.

So the earliest gateway to dealers and customers, we investigate strengthens its a corporate relationship could be integrated towards like we are crazy.

The dealers, we believe this new reservation process will improve the sell through rate and call. It David Smith will help ensure production second much customer demand.

We are excited to see the sports that makes its way into the hands of our customers around the world and I look forward to this new generation of sports betting in the streets of field force.

As evidenced by strength almost this quarter HD with after the strategic aspect of it.

Right.

And profitability.

The H D. S. Harley Davidson is uniquely positioned to be able to offer our customers valued with financing options for their motorcycles.

With over 65% of Harley Davidson motorcycles states financed by H D pets.

Going forward. It is our goal to make HD, but the preferred choice for all Harley Davidson rider, but building new capabilities like why is it the innovators are partners with sepsis.

It should be that you can pick up to the Harley Davidson success and with the planned expansion in Europe in the near to medium term I'm excited about its future.

With H B one marketplace.

You pass it was our intention to change the face of the online marketplace for pre owned Harley Davidson motorcycles.

And the best of each of those and in delight experiences a light two hour half life priorities.

And so ultimately Q1 market place has become the go to online holiday between marketplace could be that they used listings with the largest selection of pre owned Harley Davidson motorcycles in the United States.

Proving the largest selection of HD certified motorcycles, ensuring the ultimate choice in pre owned.

We've seen the policy HD certified program driving desirability onto the overall consumer experience by providing customers with an extra level of confidence in their purchases.

That's what this month HD one marketplace features over 25000, CEO and holiday motorcycle these days.

Well, it's hard to call it that the certified motorcycles.

Over 500000 units since launch and over 550 participating via its holiday because he lives.

Secondly, the strength of our network, we want to continue to ensure that our wireless access to the largest selection of the best holiday between motorcycles.

We believe the HD, one which will drive productivity in a daycare with our Hollywood some customers or do you live acknowledge the important profit why does with pre owned palisade, which took place in our communities.

So all good for cheap its initial go into United States. It is our ambition that marketplace. We continue to evolve that he will become the ultimate home for pre owned Harley Davidson motorcycles.

For over a decade holiday. So that's produced and published annual sustainability report ahead of many in our sector.

Over that time, we've made solid progress and that progress has reinforced the importance of increasing stakeholder management as a cheap.

Right.

We recognize that our future will be defined not only by our product and experiences, but how we deliver value for all our stakeholders.

The publishing of our 2020 inclusive stakeholder management report, we made a commitment to create a high performing engaged and diverse workforce create.

Creating an inclusive and more sustainable dealer network and supply base grade.

Create a path to make your environment and talk about 2050 at the latest.

A positive impact in our communities.

The reward support at least with our shareholders.

But it gives you a stakeholder management part of our strategy, we are prioritizing long term profitable growth and value for all its stakeholders.

It is our people our planet.

I invite you all to read all the reporting tool.

Through the quarter and year to date, we've seen many of our strategic initiatives performed well against our expectations.

The initial proof points of our five year strategy.

I believe there is tremendous potential for our branded business globally.

I'm sure you do you have a best in class in every market segment in which we compete.

In closing before we go to questions I would also like to provide a brief update on the <unk>.

There are situations, so far as it affects our company.

At the negotiations between the U S to continue we are optimistic that it resolution will be fall.

We're especially encouraged by the positive news the reporting of the negotiations that we've seen over the past few weeks.

Actively engaged with both the U S administration to EU and as we've said throughout we believe those holidays. There's no place in this political disputes that if not all of them make it.

Thank you and now you can take your questions.

At this time in order to ask a question. Please press star So I'm wondering your telephone keypad.

Keep had to be placed into the queue. We ask that you limit yourself to one question. If you have and if a good question. Please press star one again to re enter the queue.

Your first question comes from the line up Robert <unk> from Bank of America.

Please ask your question your line is open.

Good morning, and congrats on a strong quarter in what is obviously, a really tough environment for a lot of companies out there. My one question is on <unk>.

The pricing outlook, you know you spoke a lot about the average price promoter cycle, obviously has gone up maybe more than we were modeling and supported the quarter. The surcharges surcharges to dealers you guys did can you maybe comment about what the pricing outlook could look like next year for Harley Davidson with the new models.

And will some of these surcharges become you know sort of a higher level of pricing are you know going forward.

Good morning, Thank you for the question.

She knows with took several pricing actions over the course of the past two months and we are actively assessing their impact as we go forward that is certainly part of what we're looking at in 2022, and we remain committed to managing the profitability on the desirability of our motorcycles. So certainly that is part of the effort across all our product lines.

Up to 'twenty to 'twenty two.

Your next question comes can I can.

Can I just add one comment to that question on pricing Robin Robin you remember that our surcharges really were only affected in the U S. So as we look beyond into 2022, the opportunity is to take that pricing surcharge model.

And look holistically across the portfolio.

Your next question comes from the line Gerrick Johnson from BMO capital markets. Your line is open. Please ask your question.

Alright. Good morning. Thank you I was pleased to hear that Don will be available for Q&A, because I was going to ask.

Something in her ballpark Oh.

Don can you talk about the progress in reshaping.

The general merchandise program.

Hum.

What's been going on with your SKU reduction or are you getting better productivity.

Just talk about where we are in that process. Thank you.

Yeah. Thank you for the question. So as you know we're on a journey with our general merchandise business, which we think is an enormous untapped opportunity for Harley Davidson is a whole of yoga and had referenced in his previous commentary in previous quarters and as we talk about hard wire strategy.

The blonde opportunity and the power that exists so Harley Davidson as both in our power business and more broadly as a lifestyle business is significant and one that we intend to tap into over the course of the hardware and beyond in terms of actions taken to date.

We have increased our seasonal offering of product to bring more freshness and towards dealer channel to drive more traffic into the dealership. We continue to invest in expanding our E. Comm capabilities. So that we can offer more choice to our customers.

As I look across channels and how to engage with us.

And going forward, we intend to both continue to expand on the range and the quality of the products and to grow what is.

And part of our business inviting apparel, specifically other motorcycle volume continues to grow and diversify over the coming years.

Enormous opportunity linked directly to two motorcycles into riding apparel beyond that as we expand into lifestyle categories, and we think about the potential of the brand overall and certainly continuing to drive opportunities across channels. So that our consumers have the most choice possible so tons of opportunity and Jim and I think one.

The Harley Davidson in particular is well suited to capture.

Okay.

Your next question comes from the line of Craig Kennison from Baird. Your line is open. Please ask your question.

Yeah. Good morning, Thanks for taking my question and Sean Congratulations on your new role has to do with the new reservation system that sounds promising I'm wondering if you have any way to estimate kind of the missed retail opportunity in Q3 because of the inventory show.

<unk> is there any way to frame maybe what your loss there and then as it relates to the reservation system. What are some of the dynamics there will consumers be expected to put money down in order to reserve a slot. Thank you.

Thank you.

So first let me take the second part of your question around the impact from Q3, and then if we think that the husband a volume loss.

Certainly that is a question that it's complicated by a variety of factors as we look back to maybe 2019, given a 2020 with such a.

Unique year.

Lots of changes that have occurred as part of the hardware strategy. So Gino lessen some of these market exits and new product introductions et cetera, and as long as they have done significant changes in the environment around us we think about inventory how our dealers are operating more efficiently with the inventory that they have and certainly all of the challenges that have existed and continue.

To exist in terms of the supply.

So if you look at our share position internationally, we certainly have lost ground and we have been most affected by the difficulty in and shifting to those markets in North America, our share position would indicate that we have somewhat manage to keep up with demand, but I think it is fair to say as you look across the balance of all of those factors and as you consider what we are hearing from.

A lot of dealers.

But there is some volume loss that has occurred on some market demand, let me say more appropriately that we have not been able to necessarily wholesale in Q3.

This brings into the to the other part of your question around the preorder system reservation system. It didn't it's intended to exactly go after that time. Our main goal is to ensure that our dealers are able to meet the customers' demand as they as they walk in the door and that nobody leaves a dealership not being able to satisfy or haven't.

So when they can have the product that they desire. So the reservation system will allow us to start that dialogue with the customer to.

To be able to establish what exactly is the product of their interest have the dealer engage with the customer along that journey are providing not only opportunities as Johan mentioned to customize them to engage more fully with the product, but also have a little bit more visibility as to where that part of the production. It will allow us to also optimize our allocation processes.

Make sure that we that we start to target that that demand more specifically on how we think about production.

Ultimately ensure that the.

The customer is able to get what they want.

Part of this process. So it is very exciting for us I think it'll build upon processes that we have used before that our dealers are well familiar with that but really it intends to make sure that in this environment as we know we will continue to protect.

She will be challenged by some of the same supply factors, we have the ability to to meet the customers' demand when they are with our dealers.

Your next question comes from the line up David Gregory from from Longbow Research. Your line is open. Please ask your question.

Yeah. Thanks for taking the question and good morning, everyone. I wanted to ask about the Pan American and are obviously off to a very strong start so congratulations on the early success, there, but given that our early success, how do you invest behind that at this point and then you talked about the European market for adventure touring could you just elaborate a little further on how are you.

See that opportunity from a timing standpoint, and what your expectations would be to.

The advantage of that generate penetration into that market.

Yeah.

I'm happy to take that I think first of all the launch has been extremely successful and how we market to a new product like the Pan America for the first time I think has really resonated with our existing riders and new Harley Davidson customers and.

The fact that all our box it that all our marketing material is still available accessible on Youtube that we've engaged with bloggers and others to review up I can actually have.

You know riding Academy with the bike are immediately available I think it helped us to build significant momentum overall right now you could say that.

Pretty much every every pet Americas is sold out.

We had another piece of our inventory that you sold out within like five minutes. Just recently, so theres a very strong demand we feel how we are marketing the new products, you're exactly the way to do it to build excitement and get people into the brand and what's also interesting is that we are seeing you know about half of the customers are.

Existing holiday customers, but 50%.

50% are actually new customers or are they so we are achieving exactly what we wanted to achieve with the body and that stands true also for for our European market Ball Asian market, where we see the potential as I mentioned in my speech.

In the U S. We can now based on the momentum we've built in the last three months grow the category.

The category from here on and in Europe, obviously.

Adventure touring as a much more significant market, we believe that we can.

We can tap into the market share of our competitors because we have a truly competitive by can we will do that by getting people to write the product. That's the best thing we can do traditional advertising.

It's not going to do the trick from all perspective, but really get getting people to rise get get others to review our bikes is is giving us exactly.

The type of response, you want to see in addition to us being able to uniquely customize those spikes and make them specifically hardly in the category that we haven't been in so overall I think we have a clear plan a and b one of executing the plan and there is significant potential and in terms of units going forward.

Your next question comes from the lineup Jaime Katz from Morningstar. Your line is open pizza ask your question.

Hi, Good morning. This is Jamie I have a question on Capex and the revised spend my understanding and maybe this is wrong is that this is a temporary step down in capex, but that's a hard wire plan is still 190 million to $250 million a year and if that's the case what was printed back in 'twenty.

'twenty. One is then that's going to be pushed into 2022 for some of those projects. Thanks.

Hi, Jamie this is gena. Thanks for the question so from a from a capital standpoint, as we look out beyond 'twenty, one 'twenty, two and getting into the hardware, we do not see that that guidance changing it at this point.

The change that we made this quarter reflects one just some timing of when that cash flow is going to hit until all of the initiatives are still in motion. It's just a reflection of when that when that timing is going to hit as well as as we think about capital versus expense dollars. There were just some rejiggering of how that fell within the P&L.

So initiatives still in motion for this year and hardware and as we look beyond 'twenty one the capital guidance is not has not changed.

Thank you.

Your next question comes from the line up Joe Alto Belo from from Raymond James Your line is open. Please ask your question.

Thanks, Hey, guys. Good morning, just want to go back to the dealer inventory I think pre COVID-19.

You guys have typically had about 15 weeks or so in the channel or the intent is obviously to bring that down which it did.

In fact, we cut that in half I think youre about seven weeks right now, but seem to have overshot your target, what's the right level of inventory.

Wanted to see in the channel if it's somewhere in between call. It 11 weeks going forward.

Okay.

Well, we wouldn't want to comment on the on the specific levels. As you say there are a lot of factors that go into that I would tell you that overall, we're certainly lighter than we would we would likely I think that ties into a question ive previously around our ability to meet the demand in the market. This is entirely driven by some of our challenges on the supply chain that have been noted and.

That is exactly expect to continue into 2022, we are working to align supply with demand and we do intend to be efficient going forward working with our dealers all that we have learned in 2021 and how we can best manage our inventory and do all of this in the framework of desirability. So it is certainly a question that will be important as we move into.

2022, we believe that we are as I said, a little bit lighter now than we would want to be but something that we intend to manage as we align supply and demand into the new year.

Your next question comes from the line up James Hardiman from Wedbush Securities. Your line is open please ask your questions.

Hi, good morning, Thanks for taking my call. So a question on the guidance specifically the margin guidance.

Maintained it at 6% to 8% for the year, obviously three quarters into the year sort of the implied guidance range for <unk> you could you could kind of drive a truck through it at this point is it at least safe to say that we're going to be at the high end of that range.

We finished the year and then on the supply chain front I'm curious I really like slide nine and sort of how you guys broke out all of the components of what's going on with supply chain, maybe bottom line that for us and help us sort of quantify just the magnitude of the impact.

But all of that stuff is having on your margin for this year.

Yes.

Perfect morning, James This is gena I'm actually going to start with the second part of your question and then come back to how this plays into guidance.

So as we as we move through Q2 to Q3, we did see the the broad supply chain environment and get worse from a numeric standpoint actually that that then the impact to our margin structure was relatively the same. So when you look at when we talked last quarter, we talked about at call it five basis points or more.

Points of inflation that was hitting the P&L between logistics and raw materials. As we went into Q3, we saw that same kind of five points hit the P&L, but it was in different spots. So logistics gotta take better and then the the broader raw material inflation and supplier components piece of it got worse.

From an operational standpoint, we saw the same thing so we sell logistics start to stay equally equally tough so no material improvement in the logistics environment, but there was also no significant degradation as well, but on the supplier side and what we saw going on with with components that became a tougher environment.

And for our organization to manage through I mean, our team is doing a fantastic job working hand in hand, with all of our suppliers to make sure that we're getting the parts in and keeping our plants running and you know to date, we have not seen any sort of material blackout plant shutting down, which which is which is good news, but we did see that environment.

Within the suppliers get tougher and that impacted our production levels as as we've talked about so we do think as we move into Q4, we are stably in the same spot as Q3s, we're calling you know from a from a inflation outlook for Q4, we think it's going to play very similar to what we saw here in Q3.

And as we think about the margin guidance in a 6% to 8% that that has been factored into that guidance I'm not going to comment on if we think we're gonna be at the higher end or lower end, we feel we felt confident in our guidance and that that we're giving but there is just still.

Volatility that is within the supply chain say, so we're going to we're going to stick with that range for now.

Your next question comes from the line up Billy Cavaness from Morgan Stanley. Your line is open. Please ask your question.

Hi, two questions, one yoga and what are the sort of one or two areas. The bright spots that you see that that you have.

Visibility onto the market may be missing like one or two things that you're excited about and then secondly, Gino just a question on HD vest instead of op income in 2022 are you able to just provide any color there on sort of the trajectory given the sort of growth this year.

You know around 100% of the midpoint of your guide just where does that go next year. Thanks.

Okay.

Yes, that's a really good.

Good question, I keep asking myself that bet threats.

Are there more than a few bright spots I think and I've tried to highlight them.

Day in and in the last quarter.

We are executing extremely well S Pella hotwire strategy.

At least on plan, if not even better and as I said I'm I'm I'm really excited about.

How everything is going in a tough environment, we have to bear that in mind, we have.

The technical challenges with supply, which are significant but at the same time, we are executing really well on our longer term strategies I mentioned and it's not just that.

One of the other bright spot I think there are several including and in particular with our new products that we've launched a sports dash with bank of America or some of our other multimedia products.

You know our new icons collection.

Collection market place you name it are standing up lifeway as a separate division in loss has really happened in the first nine months of the year not.

Particularly piece, but with the progress we are making so I'd say, it's not just one or two bright sports I think across the board we are executing extremely well based on our strategy.

There are no further question at this time I will now turn the call over back to Mr. Shawn Collins.

Well thanks, everyone for joining today's call are we really hope you have a great day.

This concludes today's conference. Thank you everybody.

Thank you for participating you may now disconnect.

Mhm.

[music].

Yeah.

[music].

Uh huh.

[music].

[music].

[music].

Yeah.

Thank you for standing by and welcome to the 2021 third quarter Investor and Analyst Conference call.

At this time all participants are in a listen only mode.

After the speaker's presentation, there will be a question and answer session.

To ask a question during the session you will need to press star one on your telephone.

We used to be advised that today's conference is being recorded.

And they forget assistance. Please press star Zero I would now like to hand, the conference over to your Speaker today, Mr. Sean Collins. Thank you. Please go ahead Sir.

Thank you good morning.

Everyone.

This is Shawn Collins, the new director of Investor Relations at Harley Davidson.

You can access the slides supporting today's call on the Internet at Investor Dot Harley Davidson Dotcom.

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 SEC Harley Davidson disclaims any obligation to update information in this call joint.

Joining me this morning are CEO, Hilde, <unk> and CFO Jean a theater. In addition, chief commercial Officer, Adele, who Sullivan, who joined for the Q&A.

With that Youll can why don't we get started.

Thank you Shawn and welcome to the team.

I also want to thank Shannon Burns for his great work in Investor relations over the past three years as he moves to a new finance role as part of our Lifelock Division.

Good morning, everyone and thank you for joining us today.

We delivered a solid quarter and are pleased with our year to date performance, where you've seen many proof points that our hot wide strategic initiatives that set with a solid foundation for future growth as Harley Davidson.

It's part of the Hotwire strategy, we would need a focus on profitably driving our core business.

2021 we've been encouraged by the recovery of the drilling market.

Bank of America, too and sits at the cobalt mission and our brand.

We are committed to defending and expanding our sand segment and see potential for future growth.

That's effectively targeting high potential category, such as adventure touring with a kind of America.

Oh, what's the sports bets, we also maintained our focus on long term profitability potential.

Thanks to our brand and product capabilities.

The increased demand CEO.

Across both our core and expanding categories and that's caused the momentum behind the holiday brand in all expense.

An adventure.

We've also seen interest increasing approach new riders with a marked increase in the participation in the holiday riding Academy.

And like we've seen why didn't you cut any participation and completion increased 20% over 2019.

In addition to what strategic changes as part of us being a market strategy locker headwinds, including a variety of challenges from supply chain shortages to congestion at ports and increased shipping times.

In fact in all production and our.

That supplies in Q3, and particularly in our international markets.

Like I said I think the challenges are likely to continue into 2022.

<unk> is committed to managing the effects of the disruption leveraging that scale across the network and infrastructure to mitigate the impact on our business.

That's it I'm very excited by the global potential of holiday.

And in the coming years.

And as we focus on more profitable motorcycle unit as part of our strategy. We continue our journey towards a more efficient use of inventory.

While we were below our internal inventory strategy, we've seen our dealer community that improve the profitability and therefore improve the overall health of policy that Nicholas.

I now hand over to Jim to provide more details on our financial performance for the quarter and year to date.

Thank you, Ken and Hello, everyone.

Third quarter results reflect continued demand momentum as evidenced by our strong wholesale unit growth and share performance across your market.

As Hilton said, we did experience increased supplier volatility, which impacted our production and supply levels for the quarter. Despite.

Despite this our financial results demonstrate our agility and maximizing profitability, including the execution of a pricing surcharge in the U S optimizing production schedules to prioritize our most profitable models in market.

And enacting tighter operating expense controls.

In the quarter total revenue of $1 $4 billion were 17% ahead of last year behind increased shipments and favorable motorcycle unit mix, primarily driven by the actions undertaken as part of the rewire.

Total operating income of $204 million was ahead of last year with growth across both of our reporting segments.

The motorcycle segment, which includes our general merchandise and parts and accessories products delivered $98 million of operating income, which is $51 million better than last year.

And the financial services segment delivered $107 million of operating income, which is $15 million better than last year.

Third quarter GAAP earnings per share of $1. Five is 78 points better than last year are up 35% year over year.

When adjusting to exclude the impact of tariffs and restructuring charges. Our adjusted EPS was $1 18, and up 12% year over year.

Turning to Q3 and year to date results revenue of $4 $3 billion is 30% ahead of 2020 and operating income of $831 million with $701 million ahead of last year.

Year to date results reflect the strong unit growth over the pandemic and that impacted results in 2020 as well as the positive impact from last year's Rewire actions.

GAAP year to date earnings per share was $4.06 up 342 from a year ago, while adjusted earnings per share was 429 up 310 from last year.

Global retail sales of new motorcycles were down 6% in the quarter with growth in North America offset by declines in our international market.

North America Q3, retail sales were up 2% versus last year, driven primarily by 5% growth in Grand American touring our most profitable segments.

And the successful launches of Pan American sports dress.

Pan American maintained its status as the number one selling adventure touring model in the U S and since launch earlier this year, capturing a 16% market share in the third quarter and a rapidly growing adventure touring segment.

After much anticipation the all new sports dress motorcycles began shipping to dealers late in Q3, and we have seen very strong sell through today.

In our international markets. The retail sales declines were primarily driven by the actions taken during required to exit markets and prune unprofitable not modeled.

And APAC sales were disproportionately impacted by the decision to exit the unprofitable streets and legacy Sportster bikes and in Latam the declines from the motto pruning and market exits were accompanied by pricing actions taken across select models.

Through these actions the Latam region has improved their profitability, which we expect will set up a solid foundation for future growth.

Worldwide retail inventory of new motorcycles was down at 35% versus last year and relatively flat to the previous quarter Q3 inventory has been impacted by stronger demand in the U S as well as supplier challenges, which impacted our ability to produce at planned levels.

While inventory levels are lower than our original plan, we have seen improvement in desirability as measured by stronger pricing dynamics across both new and used motorcycles and strong dealer profitability.

International markets continued to be impacted more profoundly by global transport challenges, which resulted in higher cost and longer ship times to keep parts.

Looking at revenue total motorcycles segment revenue was up 20% in Q3 and up 36% on a year to date basis.

Focusing on current quarter activity now.

Nine points of growth came from higher year over year volume for motorcycle units, including a new Pan America and sports dressed motorcycles.

Eight points of growth from mix driven by a larger percentage of touring bikes in the quarter and reductions across legacy Sportster and street.

Two points of growth from pricing and incentives and during the quarter, we increased the pricing surcharges in the U S from an average of 2% taken in Q2 to 3.5%, partially offset raw material inflation.

And finally, one point of growth from foreign exchange.

Q3 gross margin percent of $26 seven was down three percentage points versus prior year.

Imagine benefit from stronger volume profitable profitable mix and pricing was more than offset by the negative cost headwinds across the supply chain and higher EU tariffs.

Q3 operating margin finished at eight 4% and was up three six percentage points over the prior year.

The positive margin benefit from volume mix pricing and reduced restructuring expense was able to offset the negative gross margin drivers already noted.

Year to date operating margin is significantly ahead of last year, given the COVID-19 impact and it is also a 4.6 points ahead of 2019.

Despite absolute unit declined versus 2019 profit per unit has increased behind that stronger mix pricing lower incentives and an overall lower cost structure. These results validate the efforts that we took during the rewire and have set up a more profitable foundation for future growth.

As mentioned previously the global supply chain remains volatile not only for our business, but across the global manufacturing sector. Our team has continued to do a great job navigating through the impressed didn't challenges and demonstrating agility in managing production schedules to optimize output.

We have continued to see increasing inflation within raw materials and almost afraid and we are forecasting this to continue at least through the balance of the year.

To help provide additional insight into the supply chain slide nine provides detail on our cost of sales mix as well as the estimated inflation impact across the major components.

As you can see logistics costs began to increase early in the year and peaked in Q2, two and a half times higher prior year costs before settling down a bit in Q3 at two times prior year.

Q3 was better than Q2, as we move pass the costs incurred with our three PL conversion in North America.

Materials and components cost inflation accelerated through the third quarter, where we experienced a 6% to 7% increase versus last year.

This includes the cost of raw materials and higher cost of purchase components.

And finally manufacturing inflation, which includes the labor cost has been relatively consistent throughout the year at 3%.

We're forecasting continued inflation pressure across all three buckets in the fourth quarter at similar levels to what we've seen in Q3.

Yeah.

The financial services segment operating income in Q3 was $107 million up $15 million compared to last year, primarily driven by $23 million of interest expense favorability.

H DFS is retail credit loss ratio.

Historically low at 0.84%, a 56 basis point improvement over last year.

Overall retail delinquency rates had been favorably impacted by improved economic conditions and the benefits provided to individuals under the federal stimulus packages earlier this year.

Delinquency rates have continued to run much lower than pre pandemic historic levels and while we do expect delinquency rates to normalize over time, we believe losses will continue to remain lower in the short term.

Looking at H D effects as base business retail originations in Q3 were up 13% versus last year behind strong new and used motorcycle origination volume as.

As a result, and then retail finance receivables in Q3 were $6 $7 billion, which is up two 2% from last year.

In addition, the retail allowance for credit losses at the end of Q3 was five 1%, which is flat sequentially and down from five 9% at the end of Q3 last year.

A year ago, the euro the U S economy was restrained by the pandemic and this is reflected in a higher allowance rate.

While today's allowance rate has improved versus the peaks of 2020. It is still above pre pandemic levels. Given the continued uncertainties surrounding the pace of economic recovery.

Wrapping up with Harley Davidson, Inc. Financial results, we delivered year to date operating cash flow of $926 million down $210 million from the year over year period. The key driver of unfavorable cash flow with an increase in our wholesale finance receivable originations.

Total cash and cash equivalents ended the quarter at $2 $1 billion, which is $1 $5 billion lower than Q3 last year as we work down higher cash balances held as a result of the pandemic.

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

We are also maintaining our GAAP motorcycles segment operating income margin guidance of 6% to 8%, which is inclusive of the full impact of the incremental EU tariffs and the supply chain inflation laid out earlier.

Our estimated U S tariff impact for 'twenty 'twenty 2021 has been adjusted to approximately $64 million in line with our unit forecast.

We are lowering our capital expenditures guidance to a $135 million to $150 million from the previously communicated range of 190 to 220.

The spending changes driven by tighter cash management across projects as well as changes in the cash flow phasing across key initiatives.

And lastly, we are increasing the financial services segment operating income growth guidance to 95% to 105%, which is an increase from the previously communicated range of 75% to 85%.

The improved outlook takes into account the year to date loss favorability. The reserve releases early in the in the year and our outlook for Q4.

Cash allocation priorities remain to first fund growth through the hardware initiative than to pay dividends and the company may also choose to execute discretionary share repurchases in 2021 and 2022.

Yeah.

As we look ahead to the fourth quarter on Slide 14, there are a few known and expected factors to consider regarding our revenue and profitability.

First as we've discussed we will be shifting our motorcycle production in the middle of the quarter to begin producing the 2022 model year product.

We will continue to run the plants. This dynamic will limit the amount of wholesale shipments and revenue during the fourth quarter as bike built will go into company owned inventory ahead of the model year launch.

We expect the financial impact to look very similar to the impact we saw last year in Q4.

Other Q4 factors include higher expected expense and capital spending to support upcoming launches and marketing campaigns.

And as we previously mentioned, we also expect to see supply chain inflation consistent with what we experienced in Q3.

This will be slightly offset by lower Q4 restructuring spending versus last year restructuring charges in Q4, 2021 will not be material and we no longer plan to spend the $20 million full year estimate mentioned in previous quarters.

At this point I'll turn it back to you, Okay, who will take us through our progress executing against your hardware your strategic plan.

Thank you Gino.

As we pursue our hotwire goes we continue to enhance our organization and processes focusing on the alignment and deficiency.

On the pin side guys to win as a team which is the basis for our culture. We will look to ensure that Harley Davidson has a company and the brand is getting stronger than ever and is positioned for long term success.

My Thanks go to the whole holiday team for all their hard work.

By designing engineering and most of the other motorcycles in the world with better quality innovation and craftsmanship. We continue to further our legacy as the only American motorcycle brand with 118 years of uninterrupted heritage.

As you know desirability provides the framework for our Hotwire strategic plan, our five year roadmap to both enhance and grow our position as the most exactly motorcycle brand in the world.

He got ability not only impacts those neutral with schools and our brands, but also a dedicated couldn't even at your riders and non riders alike.

As we recognize the postponed any conversations around the sport motorcycling have changed.

You're right a base that has a desire to escape.

The outdoors and rediscover a passion for garden.

All of which.

Squarely into holiday submission of delivering food to put this all in the pursuit of adventure.

It's our ability to also a motivating factor for getting people into the sport.

We know there are plenty of people who are interested in writing, but more importantly interested in riding Harley Davidson.

The Harley Davidson riding Academy is an important way in which would be a vital ship and deepen our connection with our customers.

Targeting focused in North America, we have plans to take the HD riding Academy to high potential markets across the world, including China. What did you see a high potential to leverage our brand and introduce new ideas to the schools.

We also are mindful of the need for wireless to hold their writing skills as part of their journey in pursuit of adventure.

This offering the holidays. So why do you accept them exactly the adventure touring wide of course, specifically designed offering to complement the whole kind of America motorcycles.

This course, which we're planning to expand strategically over time.

Experience for new and existing adventure touring writers.

The skills and knowledge to get more out of the off road experience like prioritizing safety.

With improved market conditions, we see a growing consumer appetite for our brand and our iconic motorcycles, including the new products, we launched this year.

Since launching hotwire, we've experienced strong demand for our products and our brands and the demand that we're seeing within our strongest and most profitable segments.

Despite the continued impact of the pandemic and related supply chain challenges, we can see the potential of our stream like market strategy as we maintain a long term focus on profitable growth in line with our hot water dishes.

As we continue to execute against our strategy of 70, 20 pin skewed towards our strongholds segments of touring large cruiser in sight, we remain guided by our commitment to critical conditions.

Profit segments.

Boston Boston potential.

It was aligned to our brand capabilities with a clear path to leadership.

At least.

We will work hard to continue to solidify and grow our position as leaders.

I'll, let you know that these segments are the most attractive is the global market in terms of our profit focus.

Another component of the hotwire selective expansion.

But focus on selective expansion also allows us to target segments that deliver balanced combination of margin and growth potential.

And with our brand capabilities and I did too.

Again, we have two segments to be supported by the right allocation of energy balance with the right investments in product brand and go to market capabilities.

And frankly this year, we launched our first adventure touring motorcycles kind of America.

Inspiration from our heritage we wanted to create a motorcycle that really defines the category.

Pan American squarely built on our mission to deliver adventure or write it off.

The road.

Performance at the Pan American has recently been demonstrated by a group of writers who reached the so much of the key laptops.

Here's the highest unpaid multiple but wrote in the world with some 18600 feet.

The coast for holiday.

This quarter saw the Pan America, 12, 50, especially become the number one selling adventure model in the United States. The accolades that we are very proud of it.

We believe we will continue to grow the category in North America, and the potential of the Pan American work across the World is significant.

For example, in North America, the category accounts for 5% of the overall market and high school at 51% since 2017.

When you look to Europe adventure touring currently represents 33% of the motorcycle market as a whole rose 33% since 2018.

We believe it's continuing to grow.

We see great opportunity to build on the success of Pan America in the first six months Lockett's look to Europe and further as he is.

As we actively target new holiday and why this venture to X rays.

In July we also launched the latest information of the iconic sports the sports states appropriately be really bad.

Building on our resolution next platform the sportswear and set a new performance standard for the long history with Houston extraordinary they'll come into market.

And he gave us going through this process has been exceptionally positive reviews.

Motorcycle comprising of evolution.

Craig with motorcycle engine.

Yes.

Calling out the bike as a pillar holiday that's b it's cool.

So one of the largest engagement rates on our holiday and social channels.

We're pleased to see this exciting translating into orders.

Its allocation being sold out through our integrated you get through the system.

With our preorder system or you guys are able to effectively create integrated reservation system.

Direct line of communications allows us to work through manufacturing relocations and improves the overall.

Trilogy on orders.

In Q4 this year holiday officially launched a reservation process in the U S and Canada to capture early demand in select 2022 bodies.

This process will provide a consistent experience both on the data com and at the dealership network.

Now do you like to engage with customers, particularly in customizing the new motorcycles.

We've been notified that when do you expect deliveries.

For future enhancements that strengthen support the holidays could be with you along the road.

With our ambitious with our customer at the forefront of everything we do.

Line two hour Hotwire goes.

Felicity earlier Patriot to dealers and customers, we investigated strengthening this important relationship to a new integrated tools that can be a crazy.

So D lives. We believe this new reservation process will improve the sell through rate of call. It David Smith will help ensure production that's unmatched customer demand.

We are excited to see the sports that makes its way into the hands of our customers around the world I look forward to this new generation of sports betting due to the streets of field force.

As evidenced by this quarter HD X is a strategic asset.

Right.

And profitability.

The ph D. S. Harley Davidson is uniquely positioned to be able to offer our customers value the financing options for their motorcycles.

With over 65% of Harley Davidson motorcycles, that's financed by H D of pets.

Going forward. It is our goal to make HD vest the preferred choice for all Harley Davidson riders by building new capabilities like why is it that innovators are partners with sepsis.

HD vest you can pick looks at the holiday success and with the planned expansion in Europe in the near to medium term I'm excited about its future.

With H D one marketplace.

H D. A pass it was our intention to change the face of the online marketplace for pre owned Harley Davidson motorcycles.

And the best of each of the MGMT like experiences alight two hour half life priorities.

Unfortunately, Q1 market place has become the go to online holiday between marketplace could be that they listings with the largest selection of either pre owned Harley Davidson motorcycles, it would be not it states.

Excluding the largest selection of HD certified in motor Insuring, the ultimate choice in pre owned.

We've seen the power of the HD certified program driving desirability.

Overall consumer experience, while providing customers with an extra level of confidence in their purchases.

That's what this month HD one marketplace features over 25000 for your own holiday Motorcyclist is 12.

Well, it's hard to call it bad for certified motorcycles.

Over 500000, do you need to use since launch and over 550 participating Jewish holiday because he lives.

Secondly, the strength of our network, you're going to continue to ensure that our wireless access to the largest selection of the best holiday between motorcycles.

We believe the HD, one mark which would drive productivity in a data room with our Hollywood some customers like do you live acknowledge the important topic why does with pre owned holiday took place in our communities.

So all good for cheap this initial go into United States. It is our ambition of marketplace. We continue to evolve that he would become the ultimate home for pre owned Harley Davidson motorcycles.

For over a decade holiday that's produced and published annual sustainability report ahead of many in our sector.

Over that time, we've made solid progress and that progress has reinforced the importance of inclusive stakeholder management as a cheap.

Bob.

As we recognize that our future will be defined not only by our product and experiences, but how we deliver value for all our stakeholders.

The publishing our 'twenty 'twenty inclusive stakeholder management report, we made a commitment to create a high performing engaged and diverse workforce create.

Creating an inclusive and more sustainable dealer network and supply base great.

The path to make zero environmental impact by 2050 at the latest.

The positive impact in our communities.

The rewards for at least with our shareholders.

But make it exclusive stakeholder management, which is part of our strategy. We are prioritizing long term profitable growth and value for all its stakeholders.

It is our people our planet.

I invite you all to read all the reporting tool.

Through the quarter and year to date, we've seen many of our strategic.

Strategic initiatives performed well against our expectations and you can take these initial proof points of all for IPO strategies.

I believe there is tremendous potential for our brand and business globally, because we have not vest until you do have the best in class in every market segment in which we compete.

In closing before we go to questions I would also like to provide a brief update on the tariff situations. So far to the pet film company.

It's the negotiations between the U S.

<unk> optimistic that the resolution will be fall.

We've been especially encouraged by the positive media reports about the negotiations that we've seen over the past few weeks.

We are actively engaged with both the U S administration. The U S. We expect throughout we believe accommodated pets know, placing boots political disputes that is much if all of them make it.

Thank you and now we'll take your questions.

At this time in order to ask a question. Please press star one on your telephone.

Bad to be placed into the queue.

Ask that you limit yourself to one question. If you have any further question. Please press star one again to re enter the queue.

Your first question comes from the line of Robert Arms from Bank of America.

Please ask your question your line is open.

Good morning, and congrats on a strong quarter in what is obviously, a really tough environment for a lot of companies out there. My one question is on.

The pricing outlook, you know you spoke a lot about the average price.

Promoter cycle, obviously has gone up maybe more than we were modeling and supported the quarter. The surcharge surcharges to dealers you guys did can you maybe comment about what the pricing outlook could look like next year for Harley Davidson with a new model. If you will some of these surcharges become you know sort of a higher <unk>.

Level of pricing are you know going forward.

Good morning, Thank you for the question.

She knows with took several pricing actions over the course of the past two months and we are actively assessing their impact as we go forward that is certainly part of what we're looking at in 2022, and we remain committed to managing the profitability on the desirability of our motorcycles. So certainly that is part of them of the athletes across all our product lines.

The 'twenty to 'twenty two.

Your next question comes the line right.

Can I just add one comment to that question on pricing Robin Robin you remember that our surcharges really were only affected in the U S. So as we look beyond into 2022 the opportunity is to take that pricing surcharge model and.

And look holistically across the portfolio.

Sure.

Your next question comes from the lineup Gerrick Johnson from BMO capital markets. Your line is open. Please ask your question.

All right. Good morning. Thank you I was pleased to hear that a dog will be available for Q&A, because I was going to ask something in her ballpark.

Don can you talk about the progress in reshaping our the.

The general merchandise program.

You know as.

What's been going on with your SKU reduction or are you getting better productivity. Just just talk about where we are in that process. Thank you.

Yeah. Thank you for the question. So as you know we're on a journey with our general merchandise business, which we think is an enormous untapped opportunity for pardon me David as a whole of Johan has referenced in his previous commentary in previous quarters and as we talk about hard water strategy.

Brand opportunity in the power that exists for Harley Davidson as both an apparel business and more broadly as a lifestyle business is significant and one that we intend to tap into over the course of the hardware and beyond.

In terms of actions taken to date, you'll note that we have increased our seasonal offering a product to bring more freshness into our dealer channel to drive more traffic into the dealership. We continue to invest in expanding our E. Comm capabilities. So that we can offer more choice to our customers as they look across channels and how to engage with us and going forward.

In terms of both continue to expand on the range and the quality of the products and to grow what is.

And part of our business inviting apparel and specifically other motorcycle volume continues to grow and diversify over the coming years.

Enormous opportunity linked directly to two motorcycles into riding apparel beyond that as we expand into lifestyle categories, and we think about the potential of the brand overall and certainly continuing to drive opportunities across channels. So that our consumers have the most choice possible.

Tons of opportunity and Jim and I think one that Harley Davidson in particular is well suited to capture.

Yeah.

Your next question comes from the line up Craig Kennison from Baird. Your line is open. Please ask your question.

Yeah. Good morning, Thanks for taking my question and Sean Congratulations on your new role has to do with this new reservation system that sounds promising I'm wondering if you have any way to estimate kind of the missed retail opportunity in Q3 because of the inventory.

<unk> is there any way to frame maybe what your loss there and then as it relates to the reservation system. What are some of the dynamics there will consumers be expected to put money down in order to reserve a slot. Thank you.

Thank you.

So first let me take the second part of your question around the impact from Q3, but I think we think that there has been a volume loss, but currently that is a question that it's complicated by a variety of factors as we look back to maybe 2019, given a 2020 with such a.

Not unique here.

Lots of changes that have occurred as part of the hard wire strategy. So Gino lessened some of these market exits and new product introductions et cetera, and as long as they have been significant changes in the environment around us and how we think about inventory how dealers are operating more efficiently with the inventory that they have and certainly all of the challenges that have existed and continue.

To exist in terms of the supply.

So if you look at our share position internationally, we certainly have lost ground and we have been most affected by the difficulty in and shifting to those market in North America, our share position would indicate that we have somewhat managed to keep up with demand, but I think it is fair to say as you look across the balance of all of those factors and as you consider what we aren't hearing from.

A lot of dealers.

But there is some volume loss, but that has occurred from some market demand. Let me say more appropriately that we have not been able to necessarily fulfill in Q3.

This brings into the to the other part of your question around the preorder system reservation system isn't it's intended to exactly go after that to them are our main goal is to ensure that our dealers are able to meet the customers' demand as they as they were.

Walk in the door and that nobody leaves a dealership not being able to satisfy or have an answer on when they can have the product that they desire. So the reservation system will allow us to start that dialogue with the customer.

To be able to establish what exactly is the product of the interest have the dealer engage with the customer along that journey are providing not only opportunities as Johan mentioned customize them to engage more fully with the product, but also have a little bit more visibility as to where that part of the production. It will allow us to also optimize our allocation processes.

I'm not sure that we that we start to target that that demand more specifically and how we think about production.

Ultimately ensure that the.

The customer is able to get what they want.

Part of this process. So it is very exciting for us I think it'll build upon processes that we have used before that our dealers are well familiar with that but really it intends to make sure that in this environment. As we know we will continue to get potentially be challenged by some of the same supply factors, we have the ability to meet the customers' demand.

When they are with our dealers.

Your next question comes from the line up David Gregory from from Longbow Research. Your line is open. Please ask your question.

Yeah. Thanks for taking the question and good morning, everyone I wanted to ask about the Pan American and obviously off to a very strong start so congratulations on the early success, there, but given that our early success, how do you invest behind that at this point and then you talked about the European market.

For adventure touring can you just elaborate a little further on how you see that opportunity from a timing standpoint, and what your expectations would be to take advantage of that generate penetration into that market.

I'm happy to take that I think first of all the launch has been extremely successful and Oh, how we marketed.

New product like the Pan America for the first time, I think has really resonated with our existing riders and new Harley Davidson customers and the.

The fact that all of our boxes that all our marketing material is sitting available accessible on Youtube that we've engaged with bloggers and others to review our bike and actually had.

You know riding Academy with the bike are immediately available I think it helped us to build significant momentum overall right now you could say that too.

Pretty much every every pen Americas is sold out and we had another fixed and our inventory that you sold out within like five minutes. Just recently, so theres a very strong demand with the feel of how we are marketing the new product exactly the way to do it to build excitement and get people into the brand and what's also interesting is that.

We are seeing you know about half of the customers are being existing Harley customers, but 50% of the other 50% are actually new customers or are they so we are achieving exactly what we wanted to achieve with the bike and that stands true also for for our European market Bar Asian market, where we see the potential as I mentioned in my speech.

And we think in the U S. We can now based on the momentum we've built in the last three months grow the category at least the category from here and in Europe, Obviously is adventure touring as a much more significant market. We believe that we can.

We can tap into the market share of our competitors because we have a truly competitive spike and we would do that by getting people to write the product. That's the best thing we can do traditional advertising.

Gonna do the trick from all perspective, but really get getting people to ride get get others to review our bikes is is giving us exactly.

The type of response, you want to see in addition to us being able to uniquely customize those bikes and make them specifically holiday in a category that you know we haven't been in so overall I think we have a clear plan a and b one of executing the plan and there is significant potential and in terms of units going forward.

Your next question comes from the line up Jaime Katz from Morningstar. Your line is open for you to ask your question.

Hi, Good morning. This is Jamie I have a question on Capex and the revised spend my understanding and maybe this is wrong is that this is a temporary step down in capex, but that's a hard wire plan, it's still a 190 million to 250 million a year and if that's the case what was printed back in 2020.

One it does then is that going to be pushed into 2022 for some of those projects. Thanks.

Hi, Jamie this is gino thanks for the question so from a from a capital standpoint, as we look out beyond 'twenty, one 'twenty, two and getting into the hardware, we do not see that that guidance changing it at this point the change that we made this quarter reflects one just some timing of when that cash.

LOE is going to hit until all of the initiatives are still in motion. It is just a reflection of when that when that timing is going to hit as well as as we think about capital versus expense dollars. There were just some kind of rejiggering of how that fell within the P&L. So initiatives still in motion for this year and hardware and as we look beyond 'twenty one.

The capital guidance is not has not changed.

Thank you.

Your next question comes from the line up Joe Alto Belo from from Raymond James Your line is open. Please ask your question.

Hey, guys. Good morning, just want to go back to the dealer inventory I think pre COVID-19.

Got it typically had about 15 weeks or so in the channel or the intent is obviously to bring that down which it did.

We cut that in half I think you're about seven weeks right now but seem to have overshot your target.

What's the right level of inventory that you want to see in the channel if it's somewhere in between call. It 11 weeks going forward.

Yeah.

Well, we wouldn't want to comment on the on the specific levels. As we say there are a lot of factors that go into that I would say that overall, we are certainly lighter than we would we would likely I think that ties into a question ive previously around our ability to meet the demand in the market. This is entirely driven by some of our challenges on the supply chain that have been noted and.

And that is exactly expect to continue into 2022, we are working to align supply with demand and we do intend to be efficient going forward working with our dealers all that we have learned in 2021 of how we can best manage our inventory and do all of this in the framework of desirability. So.

A question that will be important as we move into 2022.

Believes that we are as I said, a little bit lighter now than we would want to be something that we intend to manage as we align supply and demand into the new year.

Your next question comes from the lineup James Hardiman from Wedbush Securities. Your line is open for you to ask your questions.

Hi, good morning, Thanks for taking my call. So a question on the guidance specifically the margin guidance.

Maintained it at 6% to 8% for the year, obviously three quarters into the year sort of the implied guidance.

Range for four Q, you could you could kind of drive a truck through at this point is.

Is it at least safe to say that we're going to be at the high end of that range. As we finished the year and then on the supply chain front I'm curious I really like slide nine and sort of how you guys broke out all of the components of what's going on with supply chain, maybe bottom line that.

For us and help us sort of quantify just the magnitude of the impact that all of that stuff is having on your margin for this year.

Yes.

Perfect money James This is gena I'm actually going to start with the second part of your question and then come back to how this plays into guidance.

So as we as we move through Q2 to Q3, we did see the the broad supply chain environment get worse from a numeric standpoint actually that that then the impact to our margin structure was relatively the same. So when you look at when we talked last quarter, we talked about at call it five basis points or I'm sorry.

And points of inflation that was hitting the P&L between logistics and raw materials. As we went into Q3, we saw that same kind of five points hit the P&L, but it was in different spots. So logistics gotta take better and then the the broader raw material inflation and supplier components piece of it got worse.

From an operational standpoint, we saw the same thing so we sell logistics start to stay equally equally tough so no material improvement in the logistics environment, but there was also no significant degradation as well, but on the supplier side and what we saw going on with with components that became a tougher environment.

And for our organization to manage through I mean, our team is doing a fantastic job working hand in hand, with all of our suppliers to make sure that we're getting the parts in and keeping our plants running and you know to date, we have not seen any sort of material blackout plant shutting down, which which is which is good news, but we did see that environment.

Within the suppliers get tougher and that impacted our production levels as as we've talked about so we do think as we move into Q4, we are stably in the same spot as Q3s, we're calling you know from a from a inflation outlook for Q4, we think it's going to play very similar to what we saw here in Q3.

And as we think about the margin guidance in a 6% to 8% that that has been factored into that guidance I'm not going to comment on if we think we're gonna be at the higher end or lower end, we feel we felt confident in our guidance and that that we're giving but there is just still.

Volatility that is within the supply chain say, so we're going to we're going to stick with that range for now.

Your next question comes from the lineup Billy Cavaness from Morgan Stanley. Your line is open. Please ask your question.

Hi, two questions, one yoga and what are the sort of one or two areas. The bright spots that you see that that you have visibility onto the market may be missing like one or two things that you're excited about and then secondly, just a question on HD vest instead of op income in 2022.

Maybe to just provide any color there on sort of the trajectory given the sort of growth this year of <unk>.

Yeah around 100% of the midpoint of the guide just where does that go next year. Thanks.

Okay.

Yes, that's really good.

Good question I keep asking myself that bad credits.

Are there more than a few bright spots I think and I've tried to highlight them today and in the last quarter. I think we are executing extremely well as Perl hotwire strategy.

At least on plan, if not even better and as I said I'm I'm I'm really excited about.

How everything is going in a tough environment, we have to bear that in mind you know we have you know.

Technical challenges with supply, which are significant but at the same time, we are executing really well on our own.

Longer term strategies, I mentioned and it's not just.

One of the other bright spot I think there are several including and in particular with our new products that we've launched with sports Dash with Latin America also our other multi year products.

You know, our new icons collection marketplace.

It's standing up lifeway as a separate division in North has really happened in the first nine months of the of the yet and I'm, particularly pleased with the progress we are making so I'd say, it's not just one or two bright sports I think across the board we are executing extremely well based on our strategy.

There are no further questions at this time I will now turn the call over back to Mr. Shawn Collins.

Well thanks, everyone for joining today's call are we really hope you have a great day.

This concludes today's conference call. Thank you everybody.

For participating you may now disconnect.