Q1 2023 Harley Davidson Earnings Call

Speaker 1: Livewire is intensely focused on the final stages of bringing the brand to Europe and moving to Del Mar into production.

Speaker 1: Our launch event this week in Paris, London, Berlin, and Amsterdam bring these two major efforts together and introduce European riders to the next great edition of the Livewire Portfolio.

Speaker 1: In addition to building up our European Gu

Speaker 1: We've contracted with over 30 retail partners to join us in the field.

Speaker 1: and take on a complementary role in our marketing, sales, and service efforts.

Speaker 1: We've also announced US pricing for the Del Mar, in line with our original ambition for the bike, and the addition of a launch edition for Europe .

Speaker 1: the media and potential customers that are impressed by the technology in combination with the accessibility of the price point.

Speaker 1: We are moving into the final stages of preparing for production and expect to deliver the first bikes in the third quarter of 2023. We communicated earlier this year.

Speaker 1: In terms of our business plan, we are within our expected parameters for the year, with continued focus on getting new product to market and maximizing conversion of the reservations we've collected since announcing the Del Mar in the U.S. last year.

Speaker 1: And now I'll hand it over to Gina Getter to talk through the financial performance of Harley-Davidson and Livewire in greater detail.

Speaker 2: Thank you. Thank you and good morning everyone. Q1 2023 is the second full quarter under our new reporting structure with the three segments of HDMC, HDFS and LIDEWARE.

Speaker 2: Despite the decline in retail, the financial performance finished ahead of expectations.

Speaker 2: Pricing actions, unit mix, productivity, and proven cost management attributed to the significant HTMC margin increase versus prior year.

Speaker 2: Turning to our financial results in the first quarter, total consolidated HDI revenue of $1.8 billion was 20% higher than last year with growth across HDMC and HDFS and a decline in livewire.

Speaker 2: HCMC revenue growth was driven by wholesale motorcycle unit growth of 14%, coupled with continued pricing realization across the portfolio.

Speaker 2: Harley-Davidson financial services segment revenue was up 16% versus prior year off higher finance receivables. Harley-Davidson financial services segment revenue was up 16% versus prior year off higher

Speaker 2: In the library segment, decline of 25% was the result of lower volume across both electric motorcycles and electric balance bikes. Total consolidated HDI operating income was $370 million and $80 million better than prior exactly.

Speaker 2: HDMC operating income of $336 million was 53% higher than the prior year, driven by the growth in revenue, coupled with gains in operating margin.

Speaker 2: by 32 percent, driven by higher interest expense and higher credit losses as macro conditions happened.

Speaker 2: Finally, Livewire operating loss of $25 million included a step up in product development investment behind the launch of the Delmar product and increased operating expense associated with standing up a new company.

Speaker 2: First quarter earnings per share of $2.04 compared to $1.45 last year as a result of factors noted above as well as continued paperability in the below the line items.

Speaker 2: Global retail sales of new motorcycles were down at 12% versus the prior year. North American Q1 retail sales declined 17% due to a combination of staggered roll-ups for new products and anniversary models, as well as a shift in the customer mindset given the current macro environment.

Speaker 2: APAC Q1 retail sales grew by 3% as we continued to experience strong demand across key markets, leading high single-digit growth in Japan.

Speaker 2: AMIA Q1 retail sales declined by 6%, a decline that was primarily driven by our exit from Russia, as well as the planned shift of our unit mix to focus on more profitable units.

Speaker 2: As a result of this unit mix shift and improving FX rates, overall EMEA profitability improved. Excluding Russia, EMEA retail was down 1%. Latin America Q1 retail sales declined by 25% and was adversely impacted by regional economic conditions.

Speaker 2: deliver higher levels of profitability for the region.

Speaker 2: Improved production in the first quarter of 2023 and in the second half of last year has allowed us to improve product availability at our dealer network ahead of riding season.

Speaker 2: On a year-over-year basis, average inventory was up 70%, with the increase primarily attributed to healthier inventory levels compared to the very tight 2022.

Speaker 2: Inventory continues to be materially down versus both 2020 and 2019.

Speaker 2: From a retail pricing standpoint, US new motorcycle transaction prices finish within our desirability threshold of plus or minus 2 percentage points of MSRP. Looking at revenue, total HDMC revenue increased 21% in Q1, focusing on the key drivers through the corner.

Speaker 2: 12 points of growth came from volume driven by wholesale unit growth.

Speaker 2: 8 points of growth came from pricing and lower incentives through both global MSRP increases and pricing across the parts and accessories and apparel businesses.

Speaker 2: MIICS contributed three points of growth as we continue to prioritize our most profitable models and markets.

Speaker 2: And finally, two points of negative impact came from foreign exchange.

Speaker 2: Looking more closely at margins, as a reminder, our commentary is now based on the updated definition of C&C, which excludes Livewire.

Speaker 2: HDMC growth margin in the first quarter was 35.8%, which compares to 31.5% in the prior year.

Speaker 2: The improvement of 4.2 points was driven by pricing, unit mix, and cost productivity, offsetting the impact of cost inflation and foreign exchange headwinds.

Speaker 2: We continue to see the supply chain environment improve and we experience more modest cost inflation, which was approximately 2%.

Speaker 2: On a year-over-year basis, the deceleration continued to be largely driven by logistics, including lower expedited shipping expenses and freight rates.

Speaker 2: Raw materials and metal markets have also continued to moderate.

Speaker 2: HCMC operating margin improved to 21.6% in Q1 from 16.9% in the prior year. The improvement was driven primarily by the factors already noted.

Speaker 2: HDFS operating income in Q1 was $58 million, down 32% compared to last year. The Q1 decline was driven by higher borrowing costs and higher credit losses.

Speaker 2: In Q1, HDFS's annualized retail credit loss ratio increased to 3.2%, which compares to an annualized loss of 1.9% in fiscal 2022.

Speaker 2: The increase in credit losses was driven by several factors relating to the current macro environment.

Speaker 2: In addition, the retail allowance for credit losses for the first quarter remains steady at 5.1%.

Speaker 2: 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.

Speaker 2: Total quarter and net financing receivables, including both retail loans and dealer inventory financing, was $7.6 billion, which was up 11% versus prior year.

Speaker 2: 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.

Speaker 2: During Q1, we raised $1.25 billion in the capital market and at the end of the quarter, cash in committed bank and conduit facilities resulted in a HDFS liquidity position of $2.8 billion. This, together with the subsequent Euro MTN deal that we completed in April , has put HDFS in a very strong position from both a funding and liquidity position.

Speaker 2: For the Livewire 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 balance spikes taking a more conservative approach to inventory.

Speaker 2: 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 company's Delmar platform and the delivery of its second electric motorcycle. Operating losses also incorporate the added cost of standing up a new organization.

Speaker 2: 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.

Speaker 2: The decrease in operating cash flow was due primarily to an increase in receivable origination related to the timing and volume of wholesale shipments in Q1 2023.

Speaker 2: Total cash and cash equivalents ended at $1.6 billion, which is $167 million higher than at the end of Q1 prior year. This consolidated cash number includes $236 million from Livewire.

Speaker 2: 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.

Speaker 2: As we look to the rest of 2023, we are reaffirming our full year guidance, which expects HDMC growth of 4-7%.

Speaker 2: 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.

Speaker 2: 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.

Speaker 2: We continue to expect HDMC 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 HDFS operating income to decline by 20...

Speaker 2: loss rates for the year. There is no change to our live wire segment guidance. We continue to expect unit sales between 750 and 2,000 units in an operating loss range of $115 to $125 million.

Speaker 2: This forecast incorporates the updated launch timing and the new Delmar product. And lastly, for total HDI, we continue to expect capital investments of $225 to $259 as we continue to invest behind product development and capability enhancements.

Speaker 2: to three points of inflation compared to 4% in 2022.

Speaker 2: Labor and warehousing costs continue to be the primary drivers of inflation, with deflation and moderation expected within logistics, freight, and raw materials.

Speaker 2: We've continued to see improvements in supplier performance, which is also contributing to efficiency across the supply chain.

Speaker 2: 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 HDMC, as well as high teens' operating margin, as we lap the production shutdown from last year. We expect HDMC back half revenue and operating income to be down.

Speaker 2: and we begin to lap the interest rate increases in 2022.

Speaker 2: As we look to the 2023 capital allocation, our priorities remain to fund growth of the hardware initiative, 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 through the first quarter despite a challenging time.

Speaker 3: on your telephone keypad. To withdraw your question, please press star 1 again. We also ask you to limit yourself to one question and return to the queue for additional questions.

Speaker 3: To withdraw your question, please press star 1 again. We also ask you to limit yourself to one question and return to the queue for additional questions. Thank you.

Speaker 3: And your first question comes from the line of Robbie Ohms of Bank of America.

Speaker 4: Oh, hey, good morning. Thanks for taking my I'll try and make this one question and you know obey the rules here I think my my question is um is on the sort of the the shipments in first quarter and In maybe help us understand for the in North America for the dealer network

Speaker 4: Was there a pull forward of shipments into the first quarter the 45k dealer unit inventory levels that you ended the quarter at? Is that in the range that you want the dealers to be in and maybe help us think about how you think riding season will play out in

Speaker 4: what, how we should think about dealer inventory levels as we move through this year. And I think.

Speaker 4: You know, you mentioned the customer mindset in the current macro environment, you know, maybe changing maybe just Help us understand how we should just think about How the year and I know everything is constantly changing, but how it looks like it could play out right now

Speaker 2: Robby, you always do a fabulous job of asking three questions in one question. That is quite remarkable. I love it. But I'm going to turn that over to Adele to take that first part. I'm just joking with you. Okay.

Speaker 5: Good morning, Robbie. Thank you for the question. So, with regards to where we see the inventory position as we ended Quarter 1, we are in a much healthier position than we were last year that we have been for a couple of years, quite frankly, as we enter the hype of the writing season. We feel comfortable that we have the right levels to support the writing season in the all-critical Q2 and Q3.

Speaker 5: while remaining below what we think were damaging levels of inventory in prior years, 2019 and before that. We tracked it very closely as you can imagine in terms of both the families and mix, but most importantly the metric around MSRP realization and was noted and as was noted in the prepared comments this remains with us.

Speaker 5: I mean, it is obviously clear in an environment of rising rates and inflation that there is some moderation in customer behavior. And I think we saw that also in Q1 since it was also very early in the riding season. However, overall, we continue to emphasize a message around affordability, focusing on monthly rates. We continue to drive traffic into the dealership.

Speaker 5: where we think we have the best chance of allowing our dealers to work with each individual consumer on finding the right bike for them. And we continue to emphasize the right tools for our channel partners as well as for HDFS to allow each individual consumer to find the bike that is best suited for them.

Speaker 5: So we think with all of these pieces in place we have the right tools to support the writing season and to maintain that flat to slightly positive retail outlook for the year.

Speaker 6: Thank you.

Speaker 3: Your next question comes from the line of Craig Kennison with Beard.

Speaker 7: Hey, good morning. Thanks for taking my question. Gina, I got a going away gift for you, which is a math question. Love it. Productions put together Harvard Performing Arts in tile symbiotics for pm students COMEW and

Speaker 7: like 23,000 fewer wholesale unit shipments versus 2019.

Speaker 7: think we can run math on that and that would imply shipments near a hundred and ninety thousand bikes but you also made a comment about wholesale shipments being up year over year which would apply more than that I know it's not a huge gap but I'm just trying to really fine-tune what your wholesale shipment expectation is.

Speaker 2: in our guidance of that revenue growth of 4% to 7% is roughly, call it one to two points of wholesale unit growth.

Speaker 2: So take where we landed there in 22 and 1 to 2 percent.

Speaker 7: ahead and then just follow up on this and to what extent I gotta believe retail came in a little lighter than you expected in Q1 how are you able to hang on to kind of your shipment guidance given what looks like a softer start to the year

Speaker 2: Yeah, I think that we feel pretty good with what we're seeing for Q2 and Q3. Remember, as we talked about our retail cadence last quarter, we said, you know, Q1 and Q4 were going to be down versus a year ago and Q2 and Q3 were going to be positive. As we look at some of the factors that are in...

Speaker 2: that growth that we're expecting in Q2 and Q3 will come.

Speaker 3: Great. Good luck to you now. Thanks. Our next question comes from the line of Joseph Altobello with Raymond James.

Speaker 8: Thanks. Hey guys, good morning. I guess first question, just a follow up on Craig. Maybe kind of give us what you're seeing so far in terms of retail in April . Obviously, you have easy compares, I guess, in May and June , but I'm curious what you're seeing so far in Q2.

Speaker 9: Yeah, thanks Joseph, Jochen here. We've certainly seen an improvement in April , but today's call is really about the first quarter. But yeah, as I said, we're happy with the improvement we've seen so far as we are now starting to really get into the riding season.

Speaker 8: Okay, and just to follow up on an earlier question regarding inventory, obviously you're in a much better position than you were, you know, call it four years ago and I think I asked this question on the last call, but you guys expect some modest pipeline fill this year. I don't know how you define modest, but is it, call it three to five thousand bikes that you expect to end the year higher versus 22?

Speaker 2: Hey Joe, this is, you know, we're not, I'm not going to give you an exact number, but I think the sentiment is correct. So as we think about, you know, coming into this year, this is the first year that we felt like we were finally getting back to healthier levels of inventory healthier, not the healthiest, but healthier.

So we feel like as we exit this year, exit 23, we still have some room to fill a bit.

And what we have to bear in mind if we consider the end of the year that we are obviously prepping up for 24 and that decision we will make later in the year of how many bikes we're going to pre-produce in order to be ready with the 24 riding season or with 24 as a calendar.

So maybe just a couple points of clarification around retail. Jochen, I think you said.

You saw an improvement in April . Is that an improvement versus substantial declines in the third quarter, or was April actually up? And maybe you can help us with the writing academy channel fill that I think was in the retail number. Basically, what I'm just trying to figure out, I think you guys are still targeting the

retail growth for the year. I'm assuming that presumes a big growth number for the second quarter. Maybe just help us dimensionalize that. Yeah, look, April is not even over yet. We still have a week to go. So other than what I just said, I'd like to thank you.

if you look at the comms, if you look at the weight of the riding season in Q2 and Q3, bearing in mind that we had this production shutdown and we had limited bikes available in retail, we feel confident that the guidance of flat to slightly up is achievable. And that is all based on a mix of an inner race to finish of a new race car mail.

referring to retail but yes if you do the math that would indicate that that applies to wholesale too.

Got it. Perfect. Thank you. Your next question comes from the line of Garrett Johnson with BMO Capital Markets.

Hey, good morning. Jochen or Adele, can you please discuss the strategy behind the new release cadence rather than dropping all the CVOs and anniversary models at once? You released one CVO model and have a couple more coming in June . How about the rest and why the change in strategy?

Thank you very much for the question. Let me just maybe characterize the Q1 component and then I'll turn it back over to Jochen to give you the sense for the overall strategy. So we took a very deliberate decision at the start of this model year.

to release our anniversary bikes on a different cadence than historically in previous anniversary years. We want to maintain that level of excitement throughout the year. We think it's really important that we also have a lot of excitement around our anniversary event in Milwaukee this summer. So we have

staggered the launch of the products throughout the year to make sure that we have a little bit of excitement and traffic building activities in the dealership related to that anniversary delivery throughout the year. That's certainly a different cadence, but we think one that will support traffic and will support excitement throughout the bulk of the riding season. And then the same thing I think will go for our CVOs. It was a significant impact as we talk about retail trends in Q1. It was a significant impact as we compare to prior.

What we feel is creating excitement throughout the year, obviously primarily targeted towards the first half of the year. And then the necessity is also based on when the bikes are ready to...

manufactured and fully engineered and ready to go. So that obviously also plays into the launch. But overall we think the timing is good timing for us and we wanted to keep big excitement and grow the excitement through the riding season, which we certainly will be accomplishing based on the initial feedback we've received on the launch video of the new CVO.

Okay, that sounds great. Thank you. And there's a new motorcycle segment called lightweight. So what models are in that?

Oh, okay, that sounds great. Thank you. And there's a new motorcycle segment called lightweight. So what models are in that?

In our lightweight section, that includes our HD 350 and 500 launch in China as well as in North America. It accounts for the riding academy bikes.

Great, thank you very much.

Your next question comes from the line of Noah Zatzkin with KeyBank Capital Markets.

Hi, thanks for taking my question. Just on the credit loss rate, 3.2% in the first quarter, could you kind of help us understand what normal seasonality looks like from a loss rate percentage and then just how you're thinking about the guide?

relative to that rate, you know, as you progress through the year, how should we think about, you know, kind of that rate as it relates to a potential need to adjust the guidance. Thank you.

Good morning, Noah. This is David. So first of all, I think it's important to understand that the realized credit losses in Q1 were about the same as they were in Q4. So we had 52 million of realized credit losses in Q4, about 52.6 in Q1. So there was a very similar dollar amount.

but a slightly higher percentage because the receivables balance had dropped a little. The other thing that's important to understand is that the HDFS loan portfolio exhibits much greater seasonality than a typical auto loan portfolio. So what we tend to see, because of the riding season, we tend to see people pay a lot of the time to pay for the loan.

on time through the riding season and then we start to see delinquencies peak late in the riding season into Q4 that ultimately manifest themselves in credit losses in Q1. We've certainly seen that over the past couple of quarters.

It's also important to understand what was the driver of that increased loss. Delinquencies are not particularly elevated. They're really in the range that we've seen over the last 10 years or so. What we're starting to see, though, is that there's a subset of borrowers who are defaulting, and then when they default, there's been a...

really a weaker repossession industry and there was some declines in retail bike values last year as well. So as you start to see losses or defaults coming through, a lot of people left the repossession industry during COVID. And so because of the the repossession industry being weaker, those lower residual values on bikes

that has ultimately led to a higher severity of credit loss as opposed to the losses that we've seen previously. When we think about the rest of the year, first of all, I mentioned the seasonality. So we would expect that loss rate to reduce through Q2 and Q3, so that would lead, by definition, would lead to a lower loss rate for the year.

But as Gina mentioned in the prepared remarks, the number of things that we've been working on, we've been improving our origination strategy, we've been improving the score cut-offs and reducing loan-to-value ratios. We've improved our servicing activities, so we've put accelerated calling efforts in place. We're using texting in 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, and that's why we're indicating in our guidance that we feel confident that we can hold the guidance for the year. I don't know if you want to add something to that. My only comment is when you say lower annual rate for the year, lower than the three points.

The final question comes from the life of David McGregor with Longbow Research.

Yes, good morning everyone. I guess a couple of questions. First of all, you referenced the raw material and logistics inflation is down. Just remind us on the extent to which that's hedged or locked in at this point versus variable. I'm just trying to get a sense of how much risk there might be with the balance of the year in those factors.

From a raw material standpoint, keep in mind that we don't buy a lot of raw materials themselves. We're buying the gadgets and the gadgets that come from the suppliers. So I would say from a hedging standpoint, it's not a material.

kind of risk or opportunity for us on the raw material line, I would say. As we look to kind of the balance of the year in what we saw play through in Q1, we've absolutely seen the metal markets come back down. They're bobbing around a little bit, but we've kind of taken that current forecast out for the rest of the year.

And we do expect to see logistics rates continue to stay low. They're much lower than where they were last year, particularly within the ocean freight. As we talked about last quarter, we're continuing to see inflation within the labor rates and the warehousing. And I think what they can expect from an industrial timeframe is fast decline. So we're really JuHow to get it toWW.

You know overall for the year we're not seeing two terribly different inflation outlooks than what we talked about last quarter. Right right okay, thanks for that and then I guess we should get a live wire question in here so maybe a question for Ryan here but

You mentioned that you've got sufficient cash and liquidity for 2023 business plan, but you know, you've got a slowing macro here. We've already sort of talked about consumer sentiment. What gives you confidence that you can continue to fund development at the rate that preserves your market leadership in that product category?

Yeah, thanks for the question. I think a couple things. I mean, as you stated, we look at the first quarter here.

In particular, I think, you know, largely in line with our expectations. Uh, the state of the macro environments contributing to that. But I think as we look at the long term, of course, the important part for us to...

stay on track is to just continue with the product development and then continue to grow the units. And key to that, of course, is the product development on the Del Mar side, which we just released this past week.

And we're quite pleased with the reception to that bike. It's obviously a very important strategic pillar for us going forward. And then of course the introduction into Europe . So we think with the two of those things we continue to get greater scale, which of course improves the overall economics. So the combination of that and then obviously the starting cash position.

guidance, we had a similar cash burn, so we'll still be on track and within the parameters of the flame.

Okay, thanks very much. Your next question comes from the line of Brandon Rolle with DA Davidson. Good morning. Thank you for squeezing me in here. Just a quick question on the new versus used pricing gap. Could you talk about what you're seeing this year in terms of that gap and how it might have changed with

use 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. So certainly we are seeing some moderation in that, as you mentioned in terms of the price gap. But certainly –

ecosystem and maintaining a healthy use market is part of how we continue to build growth in the new market. 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 have seen in historical terms.

Okay, great. And just the availability of inventory there, are you seeing more entering the market or is it in line with prior years? Thanks.

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

And bearing in mind that 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 Robbie Elms 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 HDMC. The EBIT margin guide obviously...