Q1 2023 LiveWire Group Inc. Earnings Call

Speaker 1: Strategy, I'm pleased to highlight yesterday's kickoff of a new era of CVO touring bikes the subject of huge amounts of

The increase in credit losses was driven by several factors relating to the current macro environment.

In addition, the retail allowance for credit losses for the first quarter remained steady at five 1%.

Total retail loan originations in Q1 were down 15%, while dealer inventory financing or wholesale receivables were up 88% to $1 $2 billion behind stronger product availability compared to prior year.

Total quarter end net financing receivables, including both retail loans in dealer inventory financing was $7 6 billion, which was up 11% versus prior year.

Total interest expense in Q1 was up $31 million or 75% versus prior year. The increase was driven by higher average debt outstanding and a higher cost of funding.

During Q1, we raised $1 5 billion in the capital markets and at the end of the quarter cash and committed banking conduit facilities resulted in each DFS liquidity position of $2 $8 billion.

This together with a subsequent euro MTN deal that we completed in April has put <unk> in a very strong position from both a funding and liquidity position.

For the library segment first quarter revenue decreased by 25% from 10 million to $8 million with the majority of the decline driven by its channel partners for electric balanced bikes, taking a more conservative approach to inventory.

Operating loss of $25 million was in line with expectations with the step up in loss versus prior year attributed to the continued investment in product development related to the Companys del Mar platform and the delivery of its second electric motorcycle operating losses also incorporate the added cost of standing up a new organization.

Wrapping up with Harley Davidson, Inc. Financial results in the first quarter, we delivered $47 million of operating cash flow, which was down from $139 million in the prior year.

The decrease in operating cash flow was due primarily to an increase in receivable originations related to the timing and volume of wholesale shipments in Q1 2023.

Total cash and cash equivalents ended at one $6 billion, which is $167 million higher than at the end of Q1 prior year.

This consolidated cash number includes $236 million from library.

Additionally, during the first quarter as part of our capital allocation strategy, we bought back 2 million shares of our stock at a value of $84 million.

As we look to the rest of 2023, we are reaffirming our full year guidance, which expects HTM fee revenue growth of 4% to 7%.

The growth forecast incorporates approximately two points of unit growth one to two points of mix as we continue to focus on our profitable core business and one to two points of pricing as we offset a more moderated inflationary outlook.

Furthermore, we continue to expect the parts and accessories and apparel and licensing businesses to support top line growth in line with our hardware strategy.

We continue to expect <unk> operating income margin of 14, 1% to 14, 6%. We believe the anticipated positive impact from pricing and the cost productivity efforts within supply chain will offset expected cost inflation and currency headwinds.

We expect <unk> operating income to decline by 20% to 25% at this time, despite the continuation of higher losses. In Q1, we are holding to our original guidance. There is risk that losses could stay high throughout the year. However, we have several actions underway that should help to improve the total annualized realized loss.

Including increased investment behind collections and stronger repossession efforts.

We believe it is prudent to deeper into core riding season to assess the impact of loss rates for the year.

There is no change to our LIBOR segment guidance, we continue to expect unit sales between 750 in 2000 units and an operating loss range of $115 million to $125 million.

This forecast incorporates the updated launch timing and the new down our product.

And lastly for total HDI, we continue to expect capital investments of $225 million to $250 million as we continued to invest behind product development and capability enhancements.

Through the first quarter, we have seen cost inflation generally in line with our expectation and continue to expect in aggregate about two to three points of inflation compared to 4% in 2022.

Labor and warehousing costs continued to be the primary drivers of inflation with deflation in moderation expected within logistics freight and raw materials.

We've continued to see improvements in supplier performance, which is also contributing to efficiency across the supply chain.

And we remain on track to deliver our in year cost productivity goal.

From an annual cadence standpoint, we expect high teens revenue growth in the first half for H DMC as well as high teens operating margin as we lap the production shut down from last year.

We expect to HD and feedback have revenue and operating income to be down year over year, as we get back to more normalized production and seasonality compared to what we experienced in 2022.

For <unk>, we expect the operating income declines to moderate in the back half of the year as loss rates come down in line with historical seasonality pattern and we begin to lap the interest rate increases in 2022.

As we look to 2023 capital allocation, our priorities remain to fund growth of the hardware initiatives, which includes the capital expenditures mentioned previously paying dividends and executing discretionary share repurchases.

In summary, we are pleased with the resiliency of our financial results for the first quarter. Despite a challenging retail environment and we remain focused on achieving our targets throughout this year.

And with that I'll turn it back to the operator to take your questions.

Thank you as a reminder to ask a question. Please press Star then the number one on your telephone keypad to withdraw your question. Please press Star. One again, we also ask you to limit yourself to one question and return to the queue for additional questions.

We're using texting and late stage delinquencies and also making a lot of enhancements to our repossession strategy to improve the severity of loss. So all of that combined leads us to what we think will be a lower annual rate for the year.

Absolutely.

Thank you.

Your final question comes from the line of David Macgregor with Longbow Research.

Yes, good morning, everyone.

Material line.

I'd say as we look to the balance of the year.

What we saw play through in Q1, we've absolutely seen the metal markets come back down and there are bobbing around a little bit, but we've kind of taken the current that current forecast out for the rest of the year and we do expect to see logistics rates continue to stay to stay low and there are much lower than where they were last year, particularly.

You mentioned that you've got sufficient cash and liquidity for 2023 business plan, but I guess slowing.

Gives you confidence that you can continue to fund development of the REIT.

Preserves your market leadership in that product category.

Okay.

Yeah. Thanks for the question.

I think a couple of things I mean as you stated.

In particular, I think largely in line with our expectations.

As I stated the macro environment contributing to that but I think as we look at the long term of course, the important part for us.

Stay on track as to just continue with the product development and then continue to grow unit.

Thank you to that of course is is the product development on the del Mar side, which we just released this past week.

And we're quite pleased with the reception that it's obviously a very important.

Strategic pillar for us going forward.

And then of course, the introduction into Europe .

So we think that the two of those things we continue to get greater scale, which of course improve the overall economics.

So the combination of that and then obviously the starting cash position.

And our burn rate at this point.

We're comfortably able to continue with our plan and stay on track.

Are you still comfortably on track with the plan. If you end up at the low end of that shipment range that you've got in the guidance.

Okay.

Yes, even at the low end of that guidance.

We had a similar cash burn.

So it will still be on tracking within the parameters of the plan.

Okay. Thanks very much.

Your next question comes from the line of Brandon <unk> with D. A Davidson.

Good morning. Thank you for squeezing me in here just a quick question on the new versus used pricing could you talk about.

What youre seeing this year in terms of that gap and how it might have changed with used values, taking a pretty big drop to start this year versus prior years and then maybe also talk about just the availability of used inventory in the market right now thank you.

Thank you for the question certainly we are seeing some moderation in that.

You mentioned in terms of the price cap, but certainly still above historical levels overall the dynamics in the used in the new market are different this year than in prior years, given the higher availability of new.

Certainly expect that some of that shift and it is playing out as such obviously for us to use as a very important part of the overall ecosystem and on maintaining a healthy used market is part of how we continue to build growth in the new markets, but certainly there is a different dynamic this year than in prior years, though we remain I think with a healthier dynamic than we would've seen in historical.

<unk>.

Okay, Great and just.

The availability of inventory there are you seeing more entering the market.

Is it in line with prior years. Thanks.

Okay, it's largely as expected again in the dynamic of the past couple of years has been a little bit different than we would've seen historically given some of the production interruptions over the past couple of years. So some of that is working itself out as we go through the year.

Yes.

And bearing in mind that.

If.

Especially now for the first quarter much healthier new inventory available in the dealerships.

Great. Thank you.

And you have a follow up question from Robby <unk> of Bank of America.

Oh, hi, Thanks for taking my question. So I think this is for you Gina because.

This is I guess your last call with us with Harley and you will be missed but.

I was hoping you could talk about the gross margin outlook for each DMC.

What what gross margin, how we should be thinking about gross margin trends off of that incredible first quarter gross margin you guys put up through the next quarter next three quarters within the guidance.

Thanks for the question.

Yes, Q1 is definitely going to be the strongest margin quarter for us, we really had everything going our way in terms of strong.

Delivery the mix of those units was very very favorable from a pricing standpoint, we still have the benefit of both model year 'twenty two pricing that went in mid year in some of our markets plus the model year 'twenty three pricing.

And then from a productivity standpoint, we're on track and that offset offset the cost inflation that we're seeing as that supply chain is the broader supply chain has started to stabilize out a bit we did see expedited shipping rates come down pretty substantially in the first quarter. So we kind of had all of the all.

The factors, we're really firing on all cylinders with that which led to that big margin gain as we think about then the balance of the year overall, we still feel pretty comfortable in the guide that we've given and some of the factors that were positive. So like mix. As an example was very positive in the first quarter that will kind of settle out as we move through the back half of the year.

Still and slightly positive for the year, just not quite as positive as what we had in the first quarter.

Same thing I would say for pricing so pricing in Q1, the biggest change will be the biggest impact and then we start to lap the model year 'twenty two pricing in Q3 Q4. So again pricing is still positive for the year, but the impact of that.

Kind of will lessen as we as we go throughout.

The negative probably the single biggest negative besides cost inflation in the front half of the year is going to be foreign exchange that starts to become more neutralized as we move through the back end of the year. So some puts and takes but if you think about the overall margin guide I would say it is weighted to the front half.

Okay.

That's really helpful. Thanks, so much and best of luck with the riding season.

Thank you.

You have a follow up question from James Hardiman with Citigroup.

Okay.

Hey, Thanks for fitting me in so two follow ups for me on Etfs that three 2%.

To be consistent with how you ultimately guided.

Thanks, Jeff asked I guess, most notably that $5 one.

Provision rate.

The big driver there.

And then on the retail side.

I think you've made some comments that launch timing may have negatively impacted retail and so maybe there is even though wholesale was essentially the same and maybe a little bit more inventory build.

Some of that in retail benefit won't be until the second quarter.

I'm, hoping you can sort of tease that out if I think about how you framed retail rate some timing and then there are some consumer mindset.

Obviously the ladder.

It's pretty difficult to handicap.

Maybe the timing piece is maybe a little bit easier to quantify.

Okay.

So James I'll take that first part of the question and then I'll turn it over to David for Etfs. So we started at three two.

Without giving you a precise number what I'd say is embedded in our guidance is call. It a mid mid two's loss rates.

Year.

That's what we.

We feel that we can absorb that within the guidance levels that we've that we've given.

Okay.

On the retail question. So I wouldn't say that we have necessarily shipped significantly ahead in wholesales versus what we expect in retails I think we certainly have a healthier inventory position as we have discussed as we go into this riding season.

Specifically on anniversary model, the Cdos and even some of our new models is contrary to previous years, where we would've had potentially all of that inventory in the dealership to start the riding season, we are deliberately shipping that throughout the year. So you will actually see both the wholesale and the retails as we go through Q2 and Q3.

Our anniversary models or some of our new models as well as certainly for the Cdos, which will come in the back half of the year. So just the overall cadence of how the product is working its way and rippling its way out through the network is very different than what we would've seen historically and then I did want to note just reiterate the point around the <unk> that youll have made earlier.

This is a product we're sunsetting, we're still obviously there are retail, but these are significantly lower as that product sunsets and there is an expectation that our <unk> platform over time.

Evolves, we'll become sort of will grow to match some of that volume, but that dynamic certainly was a component of Q1 as well and it will evolve over the rest of the year. So I would say, it's less about us pre positioning the wholesale versus the retail as an overall the cadence just look very differently than we would've done it historically.

That's really good color. Thank you both.

Good luck with your next part.

Okay.

Okay.

There are no further questions at this time I would now like to turn it back over to kenzie for some closing remarks.