Harley-Davidson Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
April 27, 2023

There are 15 speakers on the call.

Operator

Thank you for standing by, and welcome to the Harley Davidson 2023 First Quarter Investor and Analyst Conference Call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to Sean Collins. Thank you. Please go ahead.

Speaker 1

Thank you. Good morning. This is Sean Collins, the Director of Investor Relations at Harley Davidson. You can access the slides supporting today's call on the Internet at the Harley Davidson Investor Relations website. As you might expect, our comments will include forward looking statements that are subject to business risks that could cause actual results to be materially different.

Speaker 1

Those risks include, among others, matters we have noted in our latest filings with the SEC. With that, Joining me this morning for the first part of the call are Harley Davidson Chief Executive Officer, Joepinzeit also Chief Financial Officer, Gina Getter and we also have LiveWire President, Ryan Morrissey. In addition, for the Q and A portion of today's call, we will have Harley Davidson, Chief Commercial Officer, Adele O'Sullivan. And we will also have Harley Davidson's Jochen?

Speaker 2

Thank you, Sean, and good morning, everyone. Thank you for joining us today for our Q1 2023 results. Harley Davidson delivered a solid start to 2023, the 3rd year of our hardwire strategic plan with consolidated first quarter revenue up 20 percent to 1 point $7,800,000,000 $8,900,000,000 driven by HDMC. We are pleased with our start to the year and with the execution of our strategic plan through the quarter. In this, our 120th anniversary year, we anticipate momentum to build over the year.

Speaker 2

However, we maintain a measured outlook on the wider economic picture. Harley Davidson continues on its transformational journey. As we've said before, through the foundational work of the rewire and the execution of the hardwire, We've changed our overall approach and focus as a business from prioritizing unit growth at all costs to more holistic view on profitable growth. The hardwire emphasizes stronghold categories that we believe are the most profitable motorcycle segments globally as well as selective As we navigate the evolving macro environment, we will remain committed to these principles instead of a chase for volume for volume sake in our core categories. We also remain confident in the innovation pipeline that will power our future.

Speaker 2

We continue to work with our dealers to ensure our activities and Our line to healthy demand generation, especially in the current consumer environment. The programs we have designed and are implementing share four goals: Generate demand and traffic to our dealerships and digital properties, provide tools and options to address concerns around affordability, Ensure proper management of inventory in its lifecycle and reinvigorate sales effectiveness after a couple of years of lower product availability. Desirability remains at the heart of our strategy. We believe a highly promotional approach would negatively impact profitability in our most premium categories, So we continue to focus on activities that motivate the customer to engage with our dealers to find the right bike for them. Our season opener on March 25, which saw over 90% of the network participating, is a great example of this.

Speaker 2

And we intend to continue to focus on marketing, lead generation and messaging that is aligned with our strategy. Now I'll highlight select pillars of the strategy, Starting with Pillar 1, profit focus. With the hard wire, we made a commitment to strengthen and grow Harley's leadership in our Not only are these segments the most profitable in the market globally, We also believe these segments have a potential to inspire more engagement, while compelling new customers and riders to choose Harley Davidson. Aligned to this focus in January, we kicked off our 120th anniversary with the first reveal of our 'twenty three lineup, celebrating 120 years of Harley Davidson pride and craftsmanship. This initial release included the CVO Rolled Light limited anniversary model and 6 additional limited edition motorcycles Featuring exclusive of 120th anniversary commemorative paint, finishes and details.

Speaker 2

The release also included a refreshed Harley Davidson breakout The Performance Cruiser, the exciting RoadGlide 3 trike model, a new NYSE special middleweight sport motorcycle and a restarted 3 wheeler trike model. We also made a commitment to introduce limited edition motorcycles that align with our strategy to increase desirability and to drive the legacy of Harley Davidson. With that in mind, for our 2nd reveal of the year, I'm excited to announce that next week we will be launching additions to our icons and Enthusiasts collections. Stay tuned for more. At the same time, we retired EVO Sports Day in North America, Model that was cherished over the last 65 years, but had been carrying negative margins for the motor company for many years.

Speaker 2

It is important to note that the phase out of Sportster and the cadence of CVO model rollout throughout the year has created a different retail unit volume dynamic in 2023 versus Prior years and while RevMex will be able to compensate in part for the EVO Sportster, we need to consider the different price and overall positioning. The company also continues to selectively focus on opportunities in segments aligned with the company's product and brand capabilities that demonstrate a path to market leadership and profitability. In redefining our geographic footprint, we made a commitment to With that in mind, we have been encouraged by the reception of our HDX 350 and 500 bikes available currently in APAC. We believe this launch is a new vector for growth in select markets for new customer and we're excited for future opportunities. Under our Growth Beyond Bikes pillar, we know that parts and accessories, apparel and licensing and Harley Davidson Financial Services are important For parts and accessories, despite lower retail volume, we continue to drive meaningful P and A metrics and so growth in the service RROs in our dealerships As part availability improved with gross margin expanding in Q1.

Speaker 2

For apparel and licensing in January, we We launched our 120th anniversary collection, and in February, we introduced HD Collections, a grouping of lifestyle apparel lines defined by the heritage and craftsmanship synonymous with Harley Davidson. Bringing together the many facets of motor culture while paying tribute to our heritage, We are focused on building the Harley Davidson apparel and licensing business, while gradually increasing and expanding the overall lifestyle apparel offering of our brand. To improve customer experience, we remain committed to major strategic priorities in dealer facility upgrades, Enhanced omni channel offerings and revamped motorcycle distribution capabilities, which we expect to roll out throughout 2023 2024 As well as renewed focus on HD experiences for our riding community and brand aficionados as we ramp up our 120th anniversary celebrations. But more about that later this year. In summary, while overall patterns of traffic and demand as well as other metrics of consumer health Showed some restraint in Q1.

Speaker 2

We believe that we can deliver on our expectations in year 3 of our hardwire strategy And I'm excited for what lies ahead for our company and brand. We remain committed to our strategic focus on innovation and profitability And a broader banner of desirability as a premium brand in the sector. Before I hand over to Ryan, In January, at our model year launch, I also said that everyone should stay tuned for more. As we committed to innovate in our core categories as part of our new strategy, I'm pleased to highlight yesterday's kickoff of a new era of CVO touring bikes, the subject of huge amounts of Internet intrigue already. Building on our commitment to invest in our core categories, yesterday we started teasing the next generation of our CVO Touring Motorcycles that will lead us into the future.

Speaker 2

1969 Harley Davidson introduced the Betwing fairing to the ElectraGlyde, A spark that would ignite a new generation of Harley Davidson motorcycles that would define the Grand American Touring category The lineage of motorcycles cherished by generations of riders that followed. The legacy lives on today with 2 of Harley Davidson's most iconic motorcycles in history, the Street Glide and Road Glide, whose DNA can be clearly traced back to the 1969 Electri Glide. Over the decades Harley Davidson designers and engineers have thoughtfully evolved these motorcycles, introducing incremental improvements To further enhance the riding experience, while carefully respecting the heritage and position as icons within the hearts and minds of enthusiasts around the world. Since 1999, the most aspiration of these models have been forged from Harley Davidson's Custom Vehicle Operations, CVO, A collection of limited production motorcycles that deliver the ultimate and refinement of styling, design, craftsmanship and attention to detail Along with top of the line performance, with the introduction of the all new CVO Streetlight and CVO Roadlight, We've completely reimagined 2 of Harley Davidson's most iconic motorcycles, and we've redefined the boundaries of CVO in the process. By rethinking these two models from the ground up, we are ushering in a new era of innovation, design, engineering and technology, While expanding the definition of Harley Davidson CVO and taking the Grand American Touring experience to another level.

Speaker 2

The new CVO StreetGlide and CVO RoadGlide break the mold and reset the bar for the pinnacle Harley Davidson riding experience. We'll be sharing more about these more decided at our official launch in June. Now I will hand over to Ryan Morrissey, President of LiveWire to provide an update on the quarter at LiveWire. Brian?

Speaker 3

Thank you, Yakin. Good morning, everyone. As we close the Q1 of 2023, LiveWire is intensely focused on the final stages of bringing the brand to Europe and moving to Del Mar into production. Our launch events this week in Paris, London, Berlin and Amsterdam bring these 2 major efforts together and introduce European riders to the next great addition to the LiveWire portfolio. In addition to building up our European guru team, we have contracted with over 30 retail partners to join us in the field and take on a complementary role in our marketing, sales and Service Efforts.

Speaker 3

We've also announced U. S. Pricing for the DelMar in line with our original ambition for the bike and the addition of the launch edition for Europe. Overall, we are very pleased with the reception to DelMar in both the media and potential customers that are impressed by the technology in combination with the accessibility of the price point. We are moving into the final stages of preparing for production and expect to deliver the 1st Sykes in the Q3 of 2023, as we communicated earlier this year.

Speaker 3

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. And now I'll hand it over to Gina Getter Talk to the financial performance of Harley Davidson and LiveWire in greater detail. Deanna?

Speaker 4

Thank you, and good morning, everyone. Q1 2023 is the 2nd full quarter under our new reporting structure with the 3 segments of HDMC, HDFS and LiveWire. Despite the decline in retails, the financial performance finished ahead of expectations. Pricing actions, unit mix, Productivity and prudent cost management attributed to the significant HDMC margin increase versus prior year. Turning to our financial results in the Q1.

Speaker 4

Total consolidated HDI revenue of $1,800,000,000 was 20% higher than last year with growth across HDMC and HDFS and a decline in LiveWire. HDMC revenue growth was driven by wholesale motorcycle unit growth of 14%, coupled with continued pricing realization across the portfolio. Harley Davidson Financial Services segment revenue was up 16% versus prior year, of higher finance receivables. In the LiveWire segment, decline of 25% was a result of lower volume across both electric motorcycles and electric balance bikes. Total consolidated HDI operating income was $370,000,000 $80,000,000 better than prior year.

Speaker 4

HDMC operating income of $336,000,000 was 53% higher than the prior year, driven by the growth in revenue coupled with gains in Operating margin. HDFS operating income of $58,000,000 declined by 32%, driven by higher interest expense and higher credit losses as macro conditions softened. And finally, LiveWire operating loss of $25,000,000 included a step up in product development investment behind the launch of the DelMar product and increased operating expense associated with standing up the new company. First quarter earnings per share of $2.04 compares to $1.45 last year as a result of the factors noted above as well as continued favorability in the below the line items. Global retail sales of new motorcycles were down at 12% versus the prior year.

Speaker 4

North American Q1 retail sales declined 17% due to a combination of staggered rollouts for our new products and anniversary models, as well as a shift in the customer mindset given the current macro environment. APAC Q1 retail sales grew by 3% As we continue to experience strong demand across key markets, including high single digit growth in Japan. EMEA 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. As a result of this unit mix shift and improving FX rates, overall EMEA profitability improved. Excluding Russia, EMEA Retail was down 1%.

Speaker 4

Latin America Q1 retail sales declined by 25% and was adversely impacted by regional economic conditions. However, even though retail units were down, we continue to deliver higher levels of profitability for the region. Improved production in the Q1 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. 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. Inventory continues to be materially down versus both 2020 2019.

Speaker 4

And from a retail pricing U. S. New motorcycle transaction prices finished 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 for the quarter. 12 points of growth came from volume driven by wholesale unit growth.

Speaker 4

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. Mix contributed 3 points of growth as we continue to prioritize our most profitable models And finally, two points of negative impact came from foreign exchange. Looking more closely at margins, As a reminder, our commentary is now based on the updated definition of HDMC, which excludes LiveWire. HDMC gross We continue to see the supply chain environment improve and we experienced more modest cost inflation, which was approximately 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 4

Raw materials and metal markets have also continued to moderate. HCMC operating margin improved to 21.6% in Q1 from 16.9% in prior year. The improvement was driven primarily by the factors already noted. HDFS operating income in Q1 was $58,000,000 down 32% compared to last year. The Q1 decline was driven by higher borrowing costs and higher credit losses.

Speaker 4

In Q1, HDFS' annualized retail credit loss ratio increased to 3.2%, which compares to an annualized loss of 1.9% in fiscal 2022. 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 Q1 remained steady at 5.1%. Total retail loan originations in Q1 were down 15%, while dealer inventory financing or wholesale receivables were up 88% to 1 $200,000,000 behind stronger product availability compared to prior year. Total quarter end net financing receivables, including both retail loans and dealer inventory financing was $7,600,000,000 which was up 11% versus prior year.

Speaker 4

Total interest expense in Q1 was up $31,000,000 or 75% versus prior year. The increase was driven by higher average debt outstanding and a higher cost During Q1, we raised $1,250,000,000 in the capital markets. And at the end of the quarter, cash and committed bank and conduit facilities resulted in a HDFS liquidity position of $2,800,000,000 This together with the subsequent EuroMTN deal that we completed in April has put HDFS in a very strong position from both the funding and liquidity position. For the LiveWire segment, 1st quarter revenue decreased by 25 percent from $10,000,000 to $8,000,000 with the majority of the decline driven by its channel partners For electric balance spikes taking a more conservative approach to inventory. Operating loss of $25,000,000 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 2nd electric motorcycle.

Speaker 4

Operating losses also incorporate the added cost of standing up a new organization. Wrapping up with Harley Davidson, Inc. Financial results. In the Q1, we delivered $47,000,000 of operating cash flow, which was down from $139,000,000 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.

Speaker 4

Total cash and cash equivalents ended at $1,600,000,000 which is $167,000,000 higher than at the end of Q1 prior year. This consolidated cash number includes $236,000,000 from LiveWire. Additionally, during the Q1 as part of our capital allocation strategy, we bought back 2,000,000 shares of our stock at a value of $84,000,000

Speaker 5

As we look to

Speaker 4

the rest of 2023, we are reaffirming our full year guidance, which expects HDMC revenue growth of 4% to 7%. The growth forecast incorporates approximately 2 points of unit growth, 1 to 2 points of mix as we continue to focus on our profitable core business and 1 to 2 points of pricing as we offset a more moderated inflationary outlook. Furthermore, we continue to expect Parts and Accessories and Apparel and Licensing businesses to support top line growth in line with our hardwire strategy. We continue to expect HDMC operating income margin of 14.1% to 14.6%. We believe the anticipated positive impact Pricing and the cost productivity efforts within supply chain will offset expected cost inflation and currency headwinds.

Speaker 4

We expect HDFS 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 losses, including increased investment behind collections and stronger repossession efforts. We believe it is prudent deeper into core riding season to assess the impact of loss rates for the year.

Speaker 4

There is no change to our LiveWire segment guidance. We continue to expect unit sales between 750,000 units and an operating loss range of $115,000,000 to $125,000,000 This forecast incorporates the updated launch timing and the new DelMar products. And lastly, for total HDI, we continue to expect capital investments $225,000,000 to $250,000,000 as we continue to invest behind product development and capability enhancements. Through the Q1, we have seen cost inflation generally in line with our expectation and continue to expect in aggregate about 2 to 3 points of inflation compared 4% in 2022. Labor and warehousing costs continued to be the primary drivers of inflation with deflation and moderation expected within logistics, Freight and Raw Materials.

Speaker 4

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 For HDFS, 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 patterns And we begin to lap the interest rate increases in 2022. As we look to 2023 capital allocation, our priorities remain to fund growth 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 Q1 despite a challenging retail environment, and we remain focused on achieving our targets throughout this year.

Speaker 4

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

Operator

Thank you. And your first question comes from the line of Robbie Ohmes of Bank of America.

Speaker 6

Hey, good morning. Thanks for taking my I'll try and make this one Question and obey the rules here. I think my question is on the sort of the shipments in Q1 And maybe help us understand for the in North America for the dealer network, was there a pull forward of shipments into the Q1, The 45 ks 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 and How we should think about dealer inventory levels as we move through this year. And I think you mentioned the customer mindset In the current macro environment, 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 4

Robbie, you always do a Fabulous job of asking 3 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 I'm just joking with you.

Speaker 5

Good morning, Ravi. 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 than we have been for a couple of years, quite frankly, as we enter the height 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, while remaining below what we think were damaging levels Inventory in prior years 2019 and before that. We tracked it very closely as you can imagine in terms of both Family is a mix, but most importantly, the metric around MSRP realization.

Speaker 5

And as was noted in the prepared comments, this remains And the band that we consider desirable of plusminus2%. So we think we are set up properly for the bulk of the season as it Comes in Q2 and Q3. Now with regards to your question on the overall sentiment of the consumer and what we're seeing in retail dynamics, 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 the message around affordability, focusing on monthly rates.

Speaker 5

We continue to drive traffic into the dealership 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. So we think with all of these pieces in place, we have the right Tools to support the riding season and to maintain that flat to slightly positive retail outlook for the year.

Speaker 1

Thank you.

Operator

Your next question comes from the line of Craig Kennison with Baird.

Speaker 7

Hey, good morning. Thanks for taking my question. Gina, I got a going away math going away gift for you, which is a math question.

Speaker 5

Love it. Okay. Thanks.

Speaker 7

And I'm looking at your Slide 17 and it's very helpful in that you Like 23,000 fewer wholesale unit shipments versus 2019. I think we can run math on that and that would imply Shipments near 190,000 bikes, but you also made a comment about wholesale shipments being up year over year, which would imply 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 for the year?

Speaker 4

What we've said is that's embedded in our guidance of that revenue growth of 4% to 7% is roughly call it 1 to 2 points of Wholesale Unit Growth. So take where we landed there in 2022 and 1% to 2% ahead.

Speaker 7

And then just Follow-up on this then, to what extent I got to 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 4

Yes. 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 Q1 and Q4 were going to be down This year ago and Q2 and Q3, we're going to be positive. And as we look at some of the factors that are influencing our Q2 and Q3, so this The rollout of our new products, the CVO that was just announced yesterday, the anniversary event that we have coming up. Plus, keep in mind that we had the production suspension last year during Q2 and Q3. We feel pretty confident that growth that we're expecting in Q2 and Q3

Speaker 7

Welcome. Great. Good luck, Gina.

Speaker 4

Thanks.

Operator

Your 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.

Speaker 8

Obviously, you have easy compares, I guess, in May June, but I'm curious what you're seeing so far in Q2?

Speaker 2

Yes. Thanks, Joseph. Jochen here. We've seen certainly seen an improvement in April, But today's call is really about the Q1. But yes, 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, call it, 4 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 3000 to 5000 bikes that you expect to end the year higher versus 2022?

Speaker 4

Hey, Joe. This is Gina. We're not I'm not going to give you an exact But I think the sentiment is correct. So as we think about coming into this year, this is the 1st year that we felt like we were finally getting back Healthier levels of inventory, healthier and not the healthiest, but healthier. So we feel like as we exit this year as the 23, we still have some room to fill a bit.

Speaker 2

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 We pre produce in order to be ready with the 2024 riding season or with 2024 as a calendar year. So bear that in mind as well.

Speaker 8

Okay. Thank you.

Operator

Your next question comes from the line of James Hardiman with Citigroup.

Speaker 9

Hey, good morning. So maybe just a couple of points of clarification around retail. Yochen, I think you said You saw an improvement in April. Is that an improvement versus substantial declines in the Q3 or was April actually up? And maybe you can help us with sort of 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 retail growth for the year.

Speaker 9

I'm assuming that presumes a big growth number for the Q2. Maybe just help us dimensionalize that.

Speaker 2

Yes. Look, April is not even over yet. We still have a week to go. So other than what I just said, I'd Rather not provide any additional color to it. But as I said, certainly, we've seen an improvement in April.

Speaker 2

Riding Academy are pretty small numbers. So In the overall retail figure, they don't really have a significant impact. But as Gina said, If you look at the comps, 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 It's achievable, and that is all based on a measured outlook on the wider economic picture as I've highlighted earlier.

Speaker 9

And to be clear, the flat to slightly up is both wholesale, which I think you said you're going to get a couple of points for, but also retail ultimately?

Speaker 2

That well, that comment is primarily referring to retail. But yes, if you do the math, that would indicate that that applies to wholesale too.

Speaker 9

Got it. Perfect. Thank you.

Operator

Your next question comes from the line of Gerrick Johnson with BMO Capital Markets.

Speaker 10

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

Speaker 5

Yes. Thank you very much for the question.

Speaker 3

Todd?

Speaker 5

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 the 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 product 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 deliveries throughout the year.

Speaker 5

So 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 CBOs. It was a significant impact as we talk about retail trends in Q1. It was Significant impact as we compare it to prior years, but it allowed us I think to have an extraordinary reveal or initial reveal And maybe I'll turn it back to you, Jochen, to talk a little bit more about the CDL launch.

Speaker 2

Yes, I mean not much to add. Thanks, Adele. This is we are timing our bikes based on what we feel is creating excitement throughout the year, obviously, primarily targeted towards the first half of the year. And then the necessity It's also based on when the bikes are ready to be 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 CBO.

Speaker 10

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

Speaker 5

That includes our HD 350500 launch in China, as well as in North America, it accounts for the riding academy bikes.

Speaker 10

Great. Thank you very much.

Operator

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

Speaker 11

Hi, thanks for taking my question. Just on the credit loss rate, 3.2% in the Q1. 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 as you progress through the year? How should we think about kind of that rate as it relates to a potential need to adjust the guidance?

Speaker 11

Thank you.

Speaker 12

Good morning, Noah. This is David. So first of all, I think it's important to understand that the realized credit losses in Q1 We're about the same as they were in Q4. So we had $52,000,000 of realized credit losses in Q4, about $52,600,000 in Q1. So It was a very similar dollar amount, but a slightly higher percentage because the receivables balance had dropped a little.

Speaker 12

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 writing season, we tend to see people pay on time through the writing 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. And 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.

Speaker 12

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.

Speaker 12

And so because of 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. Where 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 we would that would lead by definition would lead to a lower loss rate for the year. But as Gina mentioned in the prepared remarks, a number of things that we've been working on, we've been improving our origination strategy, we've been Improving the score cutoffs and reducing loan to value ratios.

Speaker 12

We've improved our servicing activities, so we 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 feel confident that we can hold the guidance for the year. Gina, I don't know if you want to add something to that.

Speaker 4

My only question, but when you say lower annual rate for the year, lower than the 3.2 That we posted in Q1. And we added a slide to the presentation, Slide 12, to give everyone kind of a sense for the seasonality, The historical seasonality that David was talking about.

Speaker 7

Thank you.

Operator

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

Speaker 13

Yes. Good morning, everyone. I guess a couple of questions. First of all, you referenced the raw material logistics Inflation is down. Can you just remind us on the extent to which that's hedged or locked in at this point versus variable?

Speaker 13

I'm just trying to get a sense of how much risk there might be over

Speaker 4

Yes, David. This is Gina. From a raw material standpoint, keep in mind that we don't buy A lot of raw materials themselves like the we're buying the digits and the gadgets that go to 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 and what we saw play through in Q1, we've absolutely seen the metal markets Come back down and they're bobbing around a little bit, but we've kind of taken the current that current forecast out for the rest of the year.

Speaker 4

And we do expect to see logistics rates Continue to stay low. They're much lower than where they were last year, particularly within kind of the ocean freight. As we talked about last quarter, we're continuing to see inflation within the labor rates and the warehousing. Overall for the year, we're not seeing 2 terribly different inflation outlook than what we talked about last quarter.

Speaker 13

Right, Right. Okay. Thanks for that. And then I guess we should get a LiveWire question in here. So maybe a question for Ryan here.

Speaker 13

But You mentioned that you've got sufficient cash and liquidity for 2023 business plan, but 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 of the REIT that preserves your market leadership in that product category?

Speaker 3

Yes. Thanks for the question. I think a couple of things. I mean, as you stated, As we look at the Q1 here, in particular, I think largely in line with our expectations As you stated, the macro environment is 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.

Speaker 3

And key to that, of course, It's 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

Speaker 2

a very

Speaker 3

important Strategic pillar for us going forward and then of course the introduction into Europe. So we think with the 2 of those things we continue to get greater scale Which of course improved 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.

Speaker 13

Are you still comfortably on track with the plan if you end up at the low end of that shipment range That you've gotten the guidance?

Speaker 3

Yes. Even at the low end of that guidance, we'll be at a similar cash burn. That was to be on track and within the parameters of the plan.

Speaker 13

Okay. Thanks very much.

Operator

Your next question comes from the line of Brandon Rowe with D. A. Davidson.

Speaker 14

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 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.

Speaker 14

Thank you.

Speaker 5

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 still above historical levels. Overall, the dynamics in the used in the new This year than in prior years given the higher availability of new. So we certainly expected some of that shift and it is playing out as such. Obviously, for us, used is a very important part of the overall ecosystem and maintaining a healthy used market is part of how we continue to build growth in the new market.

Speaker 5

But certainly there is a different dynamic this year than in prior years, so we remain I think with a healthier dynamic than we would have seen in historical terms.

Speaker 14

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.

Speaker 1

I would

Speaker 5

say it's largely as expected. Again, the dynamic of the past couple of years has been a little bit different We'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.

Speaker 2

And bearing in mind that especially now for the Q1, much healthier new inventory available in the dealerships.

Speaker 9

Great. Thank you.

Operator

And you have a follow-up question from Robbie Ohmes of Bank of America.

Speaker 6

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 With what you put up in the Q1 implies moderation.

Speaker 6

The gross margin for HEMC in the Q1 was pretty incredible. Can you just help us understand What gross margin how we should be thinking about gross margin trends off of that incredible Q1 gross margin you guys put up Through the next quarter next three quarters within the guidance.

Speaker 4

Absolutely. 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 unit delivery. The mix of those units was very favorable.

Speaker 4

From a pricing standpoint, we still have the benefit of both model year 2022 pricing that went in mid year in some of our markets Plus the model year 2023 pricing. And then from a productivity standpoint, we're on track and that Offset the cost inflation that we were seeing. As that supply chain as the broader supply chain has started to stabilize out a bit, we did see But I did shipping rates come down pretty substantially in the Q1. So we kind of had all of the factors We're really firing on all cylinders 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.

Speaker 4

And some of the factors that were positive, so like mix as an example was very positive in the Q1. That will kind of settle out as we move through the back half of the year, still end slightly positive for the year, just not quite as positive as what we had in the Q1. The same thing I'd say for pricing. So pricing in Q1, the biggest will be the biggest impact. And then we start to lap the model year 2022 pricing in Q3, Q4.

Speaker 4

So again, pricing is still positive for the year, but the impact of that Kind of will lessen as we go throughout. The negative probably the single biggest negative besides cost inflation in the front 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 as you think about the overall margin guide, I'd say it's weighted to the front half with a little bit of margin growth in the back half, It will definitely be front half boarded.

Speaker 6

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

Speaker 4

Thank you.

Operator

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

Speaker 9

Hey, thanks for fitting me in. So two follow ups for me. On HCFS, that 3.2%, Obviously, you're saying you think that's going to come down over the next two quarters. What does that number need to look like for the year to be consistent with How you ultimately guided ACFS, I guess most notably that 5.1 percent provision rate seems to be the big Sort of 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's even though wholesale was essentially the same and maybe a little bit more inventory build, Some of that retail benefit won't be until the Q2.

Speaker 9

I'm hoping you can sort of tease that out as I think about How you framed retail, right? There's some timing and then there's some consumer mindset stuff. Obviously, the latter It's pretty difficult to handicap, but maybe the timing piece is maybe a little bit easier to quantify.

Speaker 4

Sure, James. I'll take that first part of the question and then I'll turn it over to Adele. But for HDFS, so we started at 3.2%. I would Without giving you a precise number, what I'd say is embedded in our guidance is call it a mid-2s loss rate for the year. So that's what we feel that we can absorb that within the guidance levels that we've given.

Speaker 9

Yes.

Speaker 5

And on the retail question, so I wouldn't say that we have necessarily shipped significantly ahead in wholesale versus what we In retail, I think we certainly have a healthier inventory position as we have discussed as we go into this writing season. The point specifically on anniversary models, The CBOs and even some of our new models is and contrary to previous years, so we would have 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 wholesales and the retails as we go through Q2 and Q3 For anniversary models, for some of our new models as well as certainly for the CBOs, 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 have seen historically.

Speaker 5

And then I did want to note just reiterate the point around the sports that Joachim made earlier. This is a product that we are sun setting. We are still obviously there are retails, But these are significantly lower as that product sunsets and there is an expectation that our Rev Max platform over time As it evolves, it will become sort of will grow to match some of that volume, but that dynamic certainly was a component of Q1 as well, it will evolve over the rest of the year. So I would say it's less about us pre positioning the wholesales versus the retails and overall the cadence just looks very differently

Speaker 9

That's really good color. Thank you both and Gina, good luck at your next stop. Thank you.

Operator

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

Speaker 2

Thank you everybody for joining us today. As Robbie alluded to, Gina will be leaving us at the end of this month And this is her last quarterly call. I'd really like to take the opportunity and thank her very much for her service to the company since she started 2020, wish her the very best in her new role and she will certainly be missed. Thank you all again for joining us and have a great day.

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Earnings Conference Call
Harley-Davidson Q1 2023
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