Harley-Davidson, Inc. Q2 FY2021 Earnings Call

Good morning, everyone. You can access the slides supporting this call at investor.harley-davidson.com, click the earnings materials box in the center of the page. Our comments will include forward-looking statements that are subject to risks that could cause actual results to be materially different. Those risks include, among others, matters we have noted in our latest earnings release and filings with the SEC. Harley-Davidson disclaims any obligation to update information in this call. Joining me this morning are: CEO, Jochen Zeitz; CFO, Gina Goetter; and Chief Commercial Officer, Edel O'Sullivan, who will also be joining for Q&A. Jochen, let's get started.

Thank you, Shannon, and good morning. As always, I would like to welcome our shareholders, the financial community, dealers, employees and all our valued stakeholders and even our competition who are joining us today. We delivered a solid performance in the second quarter and first half of this year. I'm pleased with the pace of improvements we've seen with today's numbers reflecting the execution of our Hardwire strategy, as demonstrated by the positive financial results, despite significant supply chain challenges. As a company, we continue to manage through the impact of COVID-19 with the extraordinary efforts of our global team, keeping employee safety and community well-being a priority. The supply chain and logistics challenges linked to the pandemic, faced by our industry and many others continue to impact the sector with our teams managing the effects of disruption to ensure that we are able to continue building and delivering iconic Harley-Davidson products to the world. We are seeing the initial proof points of our Hardwire execution and the positive impact of this strategy on our results, particularly in the strategically important North America region. While the pandemic and related supply chain complications continue to impact our international business with certain regions at different stages of post-pandemic recovery, we can see that consumer excitement and optimism is returning. And we are encouraged by the signs of positivity in the market. I also want to note our continued fight against the proposed EU tariffs that we discussed in the last quarter. We continue to pursue all remedies to the additional EU tariffs. We believe these tariffs relate to a trade dispute not of our making, and that it is unfair for our business to be targeted as part of this dispute. The initial outcomes of the trade talks at the G7 meeting are encouraging, and we remain hopeful for resolution. I will talk more about our delivery against the Hardwire later in today's presentation. But first, I'll let Gina provide more details on the financial performance of the quarter and first half of the year. Gina?

Thank you, Jochen. Second quarter results reflected continued strong demand and improved operating margins as we manage through a volatile supply chain environment. Total revenue of $1.5 billion was 77% ahead of last year, as we lap the impacts of the COVID shutdown. Given the 2020 dynamic to help contextualize this year's performance, we've included comparisons back to 2019 for this quarter. Revenue was down 6% versus 2019, primarily driven by actions taken as part of the Rewire to prune unprofitable motorcycles, as well as exit unprofitable markets. Total operating income of $280 million was significantly ahead of 2020 and 9% ahead of 2019 with growth across both of our reported segments. The Motorcycles and Related Products segment delivered $186 million of operating income, which is $307 million better than 2020 and 3% better than 2019. Even though the quarter had 12,000 fewer units in 2019, we benefited from improved motorcycle unit mix, significantly lower sales incentives as we focused on building desirability and a reduced cost structure behind our Rewire actions. The Financial Services segment delivered $95 million of operating income, $90 million better than 2020 and 25% ahead of 2019. Second quarter GAAP earnings per share of $1.33 was $1.93 ahead of Q2 2020. When adjusting to exclude the impacts of EU tariffs and restructuring charges, our adjusted EPS was $1.41, up $1.79 over the prior year. Turning to year-to-date results. Total revenue of $3 billion was 37% ahead of 2020 and 2% behind year-to-date 2019. Again, the decline versus 2019 was primarily driven by the actions taken as part of Rewire to prune the portfolio and partially offset by increased volume, driven by the shift in model year launch timing and improved unit mix. Total operating income of $627 million was $635 million ahead of 2020 and 48% ahead of 2019. The strong growth versus 2019 was driven by the Rewire actions noted as part of our Q2 performance, including favorable mix, lower sales incentives and reduced operating expense. The shift in timing of the model year launch had a positive impact as well. GAAP year-to-date earnings per share was $3.01, up $3.16 from a year ago, while adjusted year-to-date earnings per share was $3.11, up $2.98 from last year. Global retail sales of new motorcycles were up 24% in the quarter behind strong demand for core touring and large cruiser products in the U.S., as well as the successful launch of our Pan America motorcycle into the adventure touring space. North America Q2 retail sales were up 43% versus 2020 and up about 5% over Q2 2019. Growth over 2019 was driven primarily by improved sales in our core segments, touring and large cruisers. In our international markets, COVID continues to have an impact, with many key countries in various states of lockdown and reopening throughout the quarter. We also experienced a continuation of the logistics challenges noted in Q1, which resulted in longer shipping times to key ports. EMEA sales recovered after much larger declines in Q1, as sales of Touring and Cruisers rebounded. This improvement was offset by our decision to not sell Street and legacy Sportster bikes. The TAM declines were driven primarily by Rewire actions to close certain dealers, exit countries and take pricing actions across select models. We believe these actions are working to restore profitability across the market, in spite of the retail unit declines. In Asia Pacific, in particular in India and Australia, Q2 retail sales were negatively impacted by the discontinuation of Street motorcycles. The region was also disproportionately impacted by global transportation headwinds. Worldwide retail inventory of new motorcycles at our dealers was down over last year and down versus the previous quarter. Inventory levels were lower than originally planned, driven by stronger than anticipated demand, coupled with longer shipping times in our international markets. While we originally had planned for Q2 inventory levels to build coming out of Q1, we have seen that these lower levels have helped to foster increase desirability as evidenced by strong, new and used motorcycle retail prices in the U.S. and continued improvement in dealer profitability in the quarter. International markets have seen a much larger impact from the global transportation challenges, and it's likely some markets have seen retail sales impacted. Looking at revenue. Total Motorcycle segment revenue was up 99% in Q2, and up 45% on a year-to-date basis, focusing on current quarter activity, 81 points of growth came from higher year-over-year volume on Motorcycle units and parts and accessories as we lap last year's pandemic impact and work to meet the strong current year demand for our motorcycles, which includes the new Pan American, 13 points of growth for mix, driven by a larger percentage of touring bikes in the quarter, along with favorable regional mix behind strong U.S. shipments. Five points of growth from foreign exchange, and finally, one point of growth from pricing and incentives as we eliminated a majority of corporate discounts and incentives as part of The Hardwire strategy. Absolute Q2 gross margin of 30.6% and was up 14.5 points versus the prior year, driven by stronger volume and favorable unit mix. Higher logistics and raw material inflation and incremental EU tariffs were more than offset by volume leverage and other savings across our supply chain. Q2 operating margin finished at 14% and was up significantly versus the prior year due to the drivers already noted. The gross margin gain was partially offset by higher operating expense, as we lap the cost savings initiatives undertaken last year to preserve cash at the onset of the pandemic. The supply chain remains very fragile not only for our business, but for every global manufacturer. Our team has continued to do a great job managing through the unprecedented challenges. And to date, we've had no sustained downtime in our factories. We have continued to see inflation across all modes of freight as well as within raw materials, and we are forecasting this to continue throughout the fiscal year to help offset we implemented an average 2% pricing surcharge on select models in the U.S. effective July 1 for the remainder of model year 2021. The Financial Services segment operating income in Q2 was $95 million, up $90 million compared to last year. Net interest income was favorable for the quarter, driven by lower average outstanding debt and cost of funds as compared to the second quarter of last year. The total provision for credit losses decreased $75 million year-over-year, primarily due to the reserve rate changes of $63 million as we lapped last year's increase, which was largely driven by the economic impacts of the pandemic. In addition, actual credit losses were $12 million lower. The favorability in credit losses was due in part to benefits provided to individuals under the recent federal stimulus packages. Additionally, motorcycle values at auction remain elevated, as the supply of used motorcycles was limited and demand remains strong. Looking at HDFS' base business. New retail originations in Q2 were up 29% versus last year behind higher new motorcycle sales and strong used motorcycle origination volume. At the end of Q2, HDFS had approximately $820 million in cash and cash equivalents on hand and approximately $1.3 billion in availability under its committed credit and conduit facilities for total available liquidity of $2.1 billion. Cash and cash equivalents remain elevated, but were down approximately $900 million from Q1 as we continue to pull cash back down to normalized levels. HDFS' retail 30-day plus delinquency rate was 2.21%, up 46 basis points compared to the second quarter of last year, which is a high point in issuance of pandemic-related extensions. The delinquency rate continues to be favorable when compared to recent history. The retail credit loss ratio remained historically low at 0.84%, a 103 basis point improvement over last year. While we do expect the delinquency rate to normalize over time, given the influx of stimulus funding and the improved economic conditions, we believe it is likely losses will continue to remain low through the remainder of the year. Wrapping up with Harley-Davidson, Inc. financial results. We delivered year-to-date operating cash flow of $644 million, up $34 million over the prior year. The key driver of improved cash flow was higher net income, partially offset by an increase in wholesale finance receivable originations. Cash and cash equivalents ended the quarter at $1.7 billion, which is $2.1 billion lower than Q2 last year as we work down the higher cash balances that we held as a result of the pandemic. As we look to the balance of the year, we are maintaining our guidance on the motorcycle segment revenue growth of 30% to 35%. For the Motorcycle segment operating income margin, during the second quarter, the European Union made a decision to implement a six-month stay on raising the incremental tariffs from 31% to 56%, while negotiations occur between the U.S. and the EU. The step up in tariffs was originally planned for June 1, and it will now be in effect in December if a resolution does not take place prior to then. Last quarter, we provided two margin guidance ranges due to the uncertainty in how the tariff situation would evolve. We had stated our official guidance to be 7% to 9%, which assumed complete mitigation of the incremental tariffs. With the full impact of the incremental tariffs, our guidance was 5% to 7%. Given the developments throughout the quarter, our tariff exposure in 2021 is more certain, but less than what we originally communicated. Based on what we know today, our estimated tariff impact for this year is approximately $80 million versus the initial estimate of $135 million. This improvement would result in our estimated GAAP operating income margin moving from 5% to 7% to a revised guidance of 6% to 8%. If we are successful in materially mitigating the incremental EU tariffs for the remainder of 2021 and get back to the planned tariff rate of 6%, our operating margin range would remain 7% to 9%. We are increasing the Financial Services segment operating income growth guidance to 75% to 85%, which is an increase from the previously communicated range of 50% to 60%. The improved outlook takes into account the loss favorability we have seen year-to-date as well as the outlook for the rest of the year. Lastly, capital expenditures remained flat to our original guidance of $190 million to $220 million. Slide 14 provides additional context in how our seasonality and strategy shift impact the back half of the year. This chart is largely unchanged from the previous quarter, with the one exception and that it now includes the impact of the EU tariffs. Assuming the $80 million tariff impact, we expect the back half operating margin percent to be negative mid-single-digits. This back half guidance incorporates the impact of the shift in model year launch timing, logistics and raw material inflation rates in line with what we've seen throughout Q2, the approximately 2% pricing surcharge, and a step-up in operating expense as we invest into The Hardwire and prepare for the launch of model year 2022. I'll turn it back to Jochen, who will take us through our progress executing against our Hardwire strategic plan.

Thank you, Gina. As The Hardwire strategic plan is implemented, we continue to enhance organizational speed, alignment, and efficiency, which we believe has set us up to win. The changes implemented through Rewire in 2020 and the international Hardwire-related outcomes underscore the significant transformation of Harley-Davidson over the course of the past year. We continue to be guided by H-D#1 as a high-performing winning organization based on our 10 defined leadership principles, built on the powerful vision and mission of Harley-Davidson. Across our company, we continue to see the desire and growing capabilities of our team to win. We know our future successes will only come from an effort by everybody on our team. So, as ever, thank you, team Harley-Davidson. I know many of you are listening in today. Talking about winning, I'm excited that this month, our Harley-Davidson Screaming Eagle team rider, Kyle Wyman, on the inaugural Motor America King of the Bakers Championship Series aboard is Harley-Davidson Road Glide Special. Everyone at Harley-Davidson is immensely proud of our racing team and for the tireless commitment to securing this championship. Kyle's incredible dedication and focus on winning was matched by the passion and energy of the team of Harley-Davidson engineers who develop these Baker race bikes, constantly working to improve the performance of these remarkable motorcycles. This team and their success truly exemplifies the spirit of H-D#1. Not to mention, Kyle won this race despite having his arm in a cast following an injury in surgery only a couple of weeks before the final race, a true Harley-Davidson hero. This win is a strong statement for our ability to lead and innovate in our core Grand American Touring segment. As I've said since we started this journey, The Hardwire strategic plan and success is underpinned by desirability and our ambition to enhance and grow our position as the most desirable motorcycle brand in the world. Desirability is our DNA, it's embedded in our vision, it's at the heart of our mission, and it's part of our 118-year legacy. Harley-Davidson's desirability preserves the value of our customers' purchases, builds our brand beyond our riders, ensures loyalty, and drives engagement. By designing, engineering, and advancing the most desirable motorcycles in the world reflected in quality, innovation, and craftsmanship, we are building our legacy. In building a lifestyle brand valued for the emotion reflected in every product and experience for riders and non-riders alike, desirability will continue to provide the framework for our Hardwire strategic plan and the framework for our success measures. I'd now like to address a few specific highlights delivered against some of The Hardwire strategic priorities. It's been a busy few months at Harley-Davidson. Aligned to our desirability and core product and category focus in Touring and Cruisers, we continue to see an increase in consumer appetite and demand for our brand, our iconic motorcycles and our other products. The pandemic has provided a reminder of the power of getting outside, reconnecting with the Harley-Davidson community and the unique freedom and adventure that our brand represents. We continue to experience significant demand for our products and our brand with solid demand for our most profitable segments. This improved product mix is resulting in stronger year-over-year motorcycle segment margins and can be attributed directly to our desirability, in particular, in the U.S. and Canada. And while we've continued to see demand in Europe and Asia, these regions are also being affected by both the enduring impacts of the pandemic and the wider global logistics challenges. In line with the Hardwire and our streamlined market strategy, we continue to maintain a long-term focus on profitability and we are pleased with the initial outcomes as we continue to execute against the strategy. Aligned with our focus on our core segments, in April, we launched our Icons collection, produced only once, these extraordinary adaptations of production motorcycles look to our story, past and bright future. We've seen a fantastic customer response to the first model, the electrolyte revival with these limited serialized models selling out immediately. The focus on selective expansion allows us to target segments that deliver a balanced combination of volume, margin and potential and that are aligned with our brand capabilities and identity. We are in these segments to win, supported by the right allocation of time and energy, balanced with the right investments in product, brand and go-to-market capabilities. As highlighted at the last quarter, we've seen an exceptional response to our first Adventure Touring bike based on the RevMAX platform for Pan America, following its very successful launch earlier this year. Dealers and riders have been taking delivery of Pan America motorcycles as part of the sell-out pre-order allocation since May, and the response from riders on and off the road has been overwhelmingly positive, reinforcing our strategic launch within the adventure touring market. We believe the opportunity within the Adventure Touring segment is significant, not just in Europe, the largest Adventure Touring market in the world, but in North America, where the market remains a great opportunity and we are now using our power to grow it. We believe that with Pan America, we are well placed to take market share in Europe and to become the number one model in the segment in North America. With Pan America, we've seen outstanding sell-through with the initial runs selling out globally. Looking ahead, we see great potential to build on the success of Pan America and to target new riders in the Adventure Touring space. By targeting new audiences, we will continue to look to further unlock a whole new dimension of customer opportunity for the company as we continue to grow our global market share in the Adventure Touring segment. The success of Pan America reflects our focus and is an integral part of our Hardwire strategy of selective expansion. We saw the potential to build on our off-road heritage and to compete and win in what we believe is the high growth and attractive margin segment of Adventure Touring. Aligned to Hardwire, we will continue to strategically pick and compete in categories where we see high potential and where we have a clear path to winning. On July 13, we launched the Sportster S at our global reveal event from Evolution to Revolution. Sportster S is not only one of the longest continuously produced motorcycles in history, but also one of the most iconic. The Sportster S is the latest all-new motorcycle built on the Revolution Max platform, setting a new performance standard for the Sportster line. The launch of this next-generation Sportster defined by power, performance, technology and style reinforces our commitment to introduce motorcycles that align with our strategy to increase desirability and to drive the vision and legacy of Harley-Davidson. The Sportster S is equipped with a host of technologies, designed to enhance the riding experience, including three preprogrammed ride modes, which electronically control the performance characteristics of the motorcycle and the level of technology intervention. The global reveal event generated over 127 million PR impressions, with overwhelmingly positive sentiment with many publications heralding the return of the iconic Sportster. We also saw one of the highest social engagement rates in our H-D social channels. It is clear that riders around the world are excited for Sportster S. As we approach a week since launch, we have seen exceptionally strong customer engagement for Sportster S, with the highest leads generated for a new model in recent years. We're excited about the potential of this bike and look forward to seeing it hit the streets this fall. As we continue to increase our customer focus, we are also driving an updated product segmentation that better reflects our customers' needs and preferences and our unrivaled combination of product, heritage and innovation. Sportster S will be the first motorcycle in the all-new sport category. This category showcases how Harley-Davidson is innovating and redefining core motorcycle segments with unmatched Harley-Davidson technology, performance and style. The Touring category has been renamed Grand American Touring, denoting our legacy and stronghold position in a key market segment. Adventure Touring will represent our entry into a critical global segment where we're competing to win. Each of these segments, along with other existing segments such as Cruisers, will build their own personalities and products, further enhancing the customer appeal and relevance. As part of the Hardwire strategy, we also made a commitment that Harley-Davidson will lead in electric. And while we are clear that combustion remains the core of our Harley-Davidson business for the foreseeable future, we believe there is great potential for long-term growth in electric vehicles. Earlier this year, we announced our intentions to launch a dedicated EV division to allow the strategic focus to deliver desirable growth in this high-growth segment. We recognized the pioneering spirit and brand value in LiveWire for our community and took the decision to evolve the original LiveWire motorcycle into a dedicated EV brand. On July 8, we presented the evolution of LiveWire as a stand-alone brand and the introduction of LiveWire One, the electric motorcycle built for the urban experience with the power and range to take you beyond. With the MSRP at launch in the U.S. for $21,999 before any applicable tax credit, we believe LiveWire One will redefine the segment through innovative engineering and digital capabilities and bring a whole new generation of riders and non-riders into our company's fold. Innovating to win is core to our focus and as the first OEM with a hybrid omnichannel model, LiveWire combines the best in digital and physical retail, allowing the customer to interact with the brand on their own terms. By launching online at livewire.com and a 12 LiveWire brand dealers in California, New York and Texas, we placed geographic focus on EV customers and relevant charging infrastructure. As this develops, we plan to increase the physical LiveWire footprint across the U.S. and the whole of North America. We also plan to open our first LiveWire experience gallery, designed to facilitate a fully immersive brand experience in fall-winter of this year in Malibu, California. Our focus on the digital experience is aligned to the EV customer. Livewire.com, the new dedicated LiveWire app and a new interactive bike builder present a heightened ownership experience for the customer, including a digital path to purchase the first for the LiveWire brand. We've had a tremendous launch response to the new brand and building on the U.S. launch, we intend to take LiveWire to international markets in 2022. By investing in electric technology, it remains our intent to be at the forefront of innovation and development as we look to lead the EV segment. We've always been about more than a machine, and we believe our complementary businesses are huge opportunities for long-term global growth of the Harley-Davidson brand. Parts & Accessories and General Merchandise form part of the Harley-Davidson lifestyle. And together with HDFS play a valuable role in our overall vision and mission and inspiring existing and new customers to discover the adventure that is uniquely Harley-Davidson. We believe there is great potential to grow our customer base, both with riders and non-riders and to add to customer lifetime value, shaping our future success as a global lifestyle brand. Customization is a key part of our heritage. And this quarter in Parts & Accessories, we have seen a strong performance despite substantial supply chain challenges. We continue to develop and evolve our product offering as we work towards enhancing our leadership position as a definitive destination for authentic Parts & Accessories for our riders of both new and used Harley-Davidson. For many non-riders, General Merchandise is the entry point to the brand. We will be talking more about our H-D lifestyle in the fall, but we're excited by the long-term potential to leverage our brand value to invest in our online and offline retail channels and grow our General Merchandise business globally. For both, Parts & Accessories and General Merchandise aligned to our hardware ambition, we continue to evaluate opportunities to redesign our supply chain and go-to-market capabilities to drive further efficiency and growth. We also expect brand collaborations to be integral to our General Merchandise strategy and allow us to leverage the unique and powerful brand that is Harley-Davidson. Last week, we launched our first product collaboration of the year with Jason Momoa and the Harley-Davidson Museum as a limited production, American made collection of 16 vintage inspired men's apparel and accessory styles sold exclusively on harley-davidson.com and in our museum store. Jason's genuine passion for the brand reinforces how collaborations, such as this one align with our Hardwire strategy to expand our complementary businesses with engaging products, services and experiences. The response from our community to this collection has been terrific, and we expect full sell-through of the collection in the coming days. Last but not least, building on the successful launch of H-D certified last quarter, the first certified pre-owned Harley-Davidson motorcycle program ever. We are excited to launch H-D1 marketplace today on harley-davidson.com, the ultimate online destination for used Harley-Davidson motorcycles in North America. By blending the best of a digital and in-dealership experience, H-D1 marketplace is designed to facilitate a confident and seamless purchase journey for used Harley-Davidson motorcycles. For the first time in our history, H-D1 marketplace will allow all Harley-Davidson pre-owned motorcycles, including H-D certified bikes of every participating Harley-Davidson dealer to be online in one place, making it easier for customers to find that unique pre-owned motorcycle that they've been searching for. All, I repeat, all qualified dealers have signed up to participate. With financing provided by HDFS, our goal is for H-D1 Marketplace to be the number one destination for anyone looking to buy a used Harley-Davidson. Additionally, customers will have the opportunity to sell their Harley-Davidson directly to the H-D dealer network through the sell-my-bike feature. We believe the HD-1 marketplace will drive connectivity and engagement with our Harley-Davidson customers and dealers, acknowledging the important part that riders of pre-owned Harley-Davidsons play in our community. The launch of H-D1 Marketplace is also the first step in transforming h-d.com into the home of all things Harley-Davidson, from enhanced omni-channel purchase experiences to unique community engagement to exclusive content and learning on a global scale as we look to innovate online to lead the industry. Before we head to questions, I'd like to summarize some of the highlights since we launched our new Hardwire strategy. Following the new 21 motorcycles introduction, we successfully launched Pan America, our first Adventure Touring bike. We introduced H-D certified, our first-ever pre-owned program. We launched our Icons collection with electrolyte revival selling out instantly. We created a new EV division and stood up LiveWire as an independent EV brand with LiveWire One as its first product. We launched Sportster S, the evolution of the iconic Sportster as part of a reclassification of our overall market segmentation. And today, we introduced H-D number one Marketplace, the ultimate digital destination for pre-owned Harley-Davidson motorcycles in North America. We delivered strong Q2 and first-half financial performance despite the unprecedented pandemic-related supply and logistics challenges in the sector. We expect these challenges to continue and recognize the potential associated risks to our business for the remainder of the year. Harley-Davidson is a brand with global recognition in the field with 118 years of uninterrupted heritage, craftsmanship and unrivaled iconic design, we are truly unique. We believe there is tremendous potential for our brand and business globally and we will not rest until we are the best-in-class in every market we compete in. Thank you for your time this morning. And now, let's take your questions.

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

Hi, good morning. Nice quarter. Thanks for taking my question. I'm hoping that you guys can elaborate a little bit more on specific supply chain issues and maybe how you see those playing out over the remainder of the year since that's something that we're seeing across a number of industries? And how you feel you have positioned yourself defensively to maybe mitigate some of those expenses? Thanks.

Thank you, Jamie. As I mentioned, the supply chain challenges are manifold. They are not just one issue; they pop up and they go away. But the team has done a really extraordinary job to mitigate any significant outages so far. But it's not something that you can predict will continue. At this point, we are managing this situation on a daily basis. The impact obviously includes shipping delays, both inbound and outbound freight because of lengthened shipping lead times, which, as you've seen, have also affected our sales, especially in the European and Asian regions. We see congested ports, shipping container shortages, volatility in schedules and receiving. And obviously, the highly publicized semiconductor chip shortages. So all of those are challenges that affect us and affect our suppliers. But so far, so good. We have not seen any significant blackouts in our factories. We had to sometimes move models around because we had shortages on a particular bike, what we call brownouts through material availability that got impacted short-term. But overall, we've been really able to stay all stop situations or blackouts at this point. I highlighted this as a risk because it is a risk that will continue. We hope we can mitigate those risks as we have done successfully in the first half. But obviously, we can't give any guarantees at this point. We feel good about what's coming, but recognize that shortages, they solve themselves very often at the last minute. You always have going into the next quarter shortages, whether it's semiconductors or other supply that present a big potential risk. And then we managed to close the risk, thanks to the support of our suppliers and the great work that the team is doing. I hope that answers your question.

Yes. And then can you maybe just frame how you expect shipments for Adventure Touring to pan out over the rest of the year? I don't know if there was maybe some pull forward at the initial launch and then that levels out over time or if the cadence of shipments maybe remains around this level going forward?

Well, the majority of the bikes we have shipped now in the second quarter, and I'm pleased to say that we've actually achieved a goal that we've set for ourselves long-term by being the number one selling Adventure Touring model in the U.S. in the month of May and June already, which is an extraordinary result. We've grown the segment, and we've become number one in a short period of time. We will try and ship as many models as we can, but the majority of the shipments have already happened in the second quarter. And then bear in mind that in the fourth quarter is the quarter when we will now switch over to the new model year, so that enhances our guidance for the fourth quarter and for the second half.

Good morning. Thank you for taking my call, and congratulations on your success with the fans. It’s a significant win for the city. I wanted to ask about inventories. The expectation was to build inventories in the second quarter, expecting that to be the peak for the year, followed by a seasonal drawdown in the latter half. However, that has not happened, and we are still at the 13,000 domestic unit level where we began the year. So, my question is whether this delays inventory replenishment into the second half, or are you comfortable maintaining the 13,000 unit level? The implication would be finishing with even fewer units if the seasonal drawdown continues in the second half.

Thank you, James, and I appreciate your comments about the Bucks. As a company based in Milwaukee with 118 years of history, we are thrilled, and I want to congratulate the Bucks on their incredible victory last night. It has sparked widespread celebration in Milwaukee, so thank you, Bucks, for making us proud. Regarding your inventory question, as you mentioned, our inventory levels are lower than we initially planned due to stronger retail demand, and we expect this trend to continue throughout the year with normalized inventory levels planned for 2022. It is unlikely we will reach the inventory levels we originally intended either this year or in the second half. While we would have preferred higher inventory levels, we believe that the current lower levels have increased the desirability of our motorcycles. Customers are waiting for deliveries or choosing to purchase later when more inventory arrives. It is challenging to ascertain the exact impact on sales. Overall, our dealers and customers' willingness to wait has allowed us to manage the lower inventory levels. While we would have liked higher inventory, circumstances—particularly related to the supply chain—made that unattainable, and we do not expect this to change in the second half since we will sell what we produce.

No, that's right. When we put this slide in front of you last quarter, the EU tariffs weren't certain or we were still kind of holding that out of it. It could, it could not happen. Now that we have more certainty, this represents our GAAP guidance. That's right.

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

We have not seen any pushback. Obviously, it's early days, but overall, I think the market understands and the dealers and customers understand that we needed to pass on some of the price increases and the price pressures we are seeing in the market. So we've not made a decision as to '22 model year yet and what impact that might have on pricing, but we feel that the 2% increase is a good step forward, bearing in mind that we've also continued to streamline our model SKU count, and we're able to take out some less profitable bikes in the process, which overall would take the average retail price up for the company as well. So that sort of happened in the background. So two measures that we took for the second half, further streamlining of our product line and 2%.

Great. And then just quickly on Pan America. Anything you can share as far as data you have domestically for incremental customers or new customer entering that category versus share gains? And then, how is that informing your thoughts about the international opportunity?

We don't have detailed customer data available yet. However, based on what I've heard, Pan America has certainly attracted new customers while also encouraging existing Harley customers to purchase new motorcycles from Harley-Davidson. The reviews in the Adventure Touring segment have been outstanding, which is very exciting and has drawn in a new customer group for us. Overall, we've seen a good balance of new customers entering the brand to buy Adventure Touring bikes and existing customers being enthusiastic about it. This trend is true for both the U.S. and international markets, in particular.

Thank you. I have a long question about LiveWire and its rebranding strategy. Who will be the distributors for LiveWire? Will it be Harley-Davidson dealers, exclusive LiveWire dealers, or power sports dealers? Additionally, what kind of signage and fixtures can we expect at those dealerships if they are required to be Harley dealerships since this is a separate brand? Lastly, what will happen to dealers who invested in charging stations and other infrastructure last year but are not receiving LiveWire now? Thank you.

Thank you, Garry. We have already compensated our dealers for their investments in infrastructure, like charging stations, in the fourth quarter of last year. All dealers, whether they carry LiveWire or not in the future, have been reimbursed for their fourth-quarter investments. Currently, we have 12 dealerships in three states selling LiveWire. They will soon receive special signage and fixtures if they haven't already. We aim to present the stand-alone brand distinctly, but all these are qualified Harley-Davidson dealers that are now eligible or have already become LiveWire dealers. LiveWire is essentially a new brand line within Harley-Davidson. Over the next 12 months, we will expand our distribution to more dealers across the country. Therefore, those who qualify for LiveWire will represent the new brand in the U.S., with international rollout planned for 2022. Overall, our trusted Harley dealers, who meet the criteria for the LiveWire brand, will target a more urban-oriented consumer to represent LiveWire as a secondary brand.

Hey, good morning. Thanks for taking my questions as well, they relate to H-D1 marketplace, which launched today. Mostly, I just want to understand that model better. What is the economic model for Harley-Davidson? For example, will you earn any listing or transaction fees? And who are your competitors in that marketplace? And how would you frame the TAM, if you can?

As I mentioned last year, we really need to understand the used Harley-Davidson bike market, which we haven't had much visibility into before. This has always been a significant business for our dealers, but the company didn't fully grasp the used bike market. It’s an important market filled with valued Harley customers, and understanding it is our first crucial step. We're offering a listing service for free because we believe that scale is essential and this is a service benefiting our dealers. We are excited to launch the H-D1 marketplace with over 18,000 bikes available today, which is impressive for a new initiative. All our Harley-Davidson dealers are on board, highlighting the strength of this marketplace and the enthusiasm we are generating within the dealer network, as well as for our consumers. This will provide us with valuable insights and leads, which are essential for our goals. We want to facilitate the sale of used bikes for our dealers, who are listing them on our site. This presents an opportunity to grow the H-D marketplace and ensure that our other businesses, like General Merchandise and Parts & Accessories, thrive in the future. We will start with a full selection of pre-owned Harley-Davidson bikes, aiming to establish h-d.com as the primary site for everything Harley-Davidson. This is a significant move in our digital strategy that is necessary for attracting new customers and retaining existing ones within the Harley-Davidson community.

Yes. Great. Thank you. Good morning, Jochen, Gina and team. My question is on the current input cost pressures that you're seeing. Just wanted to ask if you could talk in terms of where you're seeing the most increased costs, whether it's steel, aluminum or resin products? And maybe from a quantitative standpoint, does this – did your recent 2% price increase? Is that fully or partially mitigate some of these pressures? Any context might be helpful. Thanks.

Sure. Where we're seeing it is primarily in the aluminum, in steel markets. Lumber is actually up settling down a little bit, but lumber within the quarter was up as well. And we are continuing that forecast as we look out to the back half of the year, we see elevated rates through the back half. So the 2% surcharge will not completely offset what we're seeing come at us, but it will do a good part in offsetting much of that. In terms of impact within the quarter and as you think about the margin change, the raw material increase was worth about two points of margin. So it was fairly material. And then you add on top of that all the logistics rate inflation that we're seeing, that was roughly another three points of margin. So those headwinds that are coming at us, roughly five points of margin within the quarter.

Hey, thanks for taking my question. Actually, I had – just wanted to clarify a few things. I think, first, just on the way the shipments have played out, do you guys expect the third quarter to be constrained similarly, or is there any kind of catch-up with all those pre-orders and maybe related to that, any color you can give us on how you view how the competition is handling the shortages? And is that – are you benefiting from that? And kind of how do you think things will play out as these supply chain challenges, hopefully get resolved as we move through the rest of the year?

Regarding shipments, our guidance reflects our expectations for when our product will be available in the market. We have faced some delays from the first quarter to the second quarter, and again from the second quarter to the third quarter. Specifically, in the European region, we anticipate catching up in the third quarter. However, we need to consider that the riding season in Europe concludes in October, so timing is important. Predicting shipments has become challenging because ships are frequently stopping at unplanned locations, causing timelines that typically take 30 to 40 days to extend significantly. Sometimes these delays result in shipments not arriving when anticipated due to unanticipated stops made by shippers. This has been a consistent issue for us. Therefore, flexibility is crucial in our planning, as it does not always align perfectly with our quarterly goals. That said, we are not expediting shipments just to meet quarterly deadlines; whether a product arrives in June or July does not affect our strategy. It’s important for our customers, but not relevant to our quarterly results. We will unload and ship as quickly as possible, with some shipments occurring in the third quarter despite the delays we have experienced, particularly in the second quarter.

Thank you. Maybe first, just a quick housekeeping and a bigger picture strategic question. On the raw materials and logistics, like you mentioned the five basis point headwind this quarter. Is that a good run rate for the back half, or does it actually step up because you lowered your sort of back half guidance by sort of mid-single-digits? And then Gina, I am paraphrasing here, but you sort of mentioned that you guys realized with the lower inventories even the dealers can be more profitable. So, I'm wondering like do you think that's just a 2021 dynamic, or are you changing your longer-term strategy to run leaner than maybe you were thinking prior? And if it is the latter, how should investors think about what the right level is at dealers to hold you accountable for that?

Certainly. Regarding the raw material freight costs, the rate we've observed in Q2 is expected to remain consistent in Q3 and Q4. There will be some increase in raw material costs during the second half of the year, aligning with the implementation of our pricing surcharge. Both freight and raw material inflation impacts have been factored into our guidance for the latter half of the year. Our forecast for the second half shows a decline in the range of low to mid-single digits, largely due to EU tariffs and their effect on our GAAP guidance. As for our long-term inventory strategy, we believe it has indeed enhanced desirability, which is reflected in our pricing. However, we acknowledge that our inventory levels are not yet where we want them to be. We’re gaining valuable insights into managing under tighter inventory conditions. Moving through 2022, you'll notice efforts to restore inventory levels to more optimal ranges.

Yes, thanks for squeezing me in. I guess just a question on pricing and you talked about the raw materials and the logistics. But just thinking to some of the channel checks we did this quarter, there were a lot of bikes sold above MSRP. And I'm just wondering, given the raw material inflation, the logistics issues, all the things you discussed, do you have an opportunity to recover that inflation more rapidly in 2022 than what you're seeing here with the 2% surcharge in the second half?

We are closely monitoring MSRP. While some bikes have exceeded MSRP, it's encouraging that our dealers are generally not charging significantly more than MSRP. There is one specific product category where the MSRP was higher, and we have adjusted the price for that product accordingly. Overall, we are trading at or slightly above MSRP, but there haven’t been significant sales above it, which is important from a customer perspective. We want to avoid a situation where customers feel taken advantage of due to higher prices. I'm thankful that most of our dealers are adhering to this approach. Besides a few products where we've made adjustments, we haven't seen substantial sales above MSRP. Looking ahead to the '22 model year, we are considering various factors, including raw material price increases, shipping costs, and potential tariffs as we finalize our pricing strategy.

Great. Thank you for taking my question. Good morning. A couple of questions on the EU tariff situation. First, at a 31% rate, I assume you guys are not profitable in Europe. I want to confirm that? And secondly, what steps are you taking to mitigate that, or do you want to wait and see how negotiations play out before making any drastic changes to your business model in Europe? If it does go to 56%, how would you respond to that hypothetically?

Adjusting prices to offset a 31% rate is not feasible, as it would effectively price us out of the market, which is not our goal. We are committed to Europe for the long term, and this is significant for our dealers and customers. We anticipate having clarity on the tariffs before the year ends. We remain hopeful for a positive outcome since current steel and aluminum tariffs seem unreasonable given the high prices, which only contribute to inflation that no one desires. Additionally, Harley-Davidson faces unfair tariff conditions; while we pay tariffs on bikes entering Europe, our European competitors benefit from low tariffs of 2% to 3% when selling to the U.S. This situation is not sustainable or fair, and we believe it needs to change. We will factor this into our plans for '22, but I aim to resolve these issues before we finalize our pricing. However, we won't be able to pass on increased oil prices if the tariffs remain in '22. We’re not providing details on regional profitability, but we see considerable potential in Europe regardless of the tariffs.

Thank you, again. On LiveWire, you've recently taken some actions to carve out the brand, give it a new life. I've seen the new model, LiveWire One, more affordable price point, looks great. Just the question here is, like, what's the incremental spend required in EVs in terms of the development costs, CapEx, branding, R&D, hiring more people, et cetera? And have some of this already been spent, given the previous LiveWire launches? Thank you.

We are not providing a breakdown of our SG&A for LiveWire at this time. We are currently working on the business model and will be able to discuss it in future quarters. We have increased our investment in electric motorcycles overall and are establishing a separate division. We believe this is the right move, and it is essential to hire the right talent to succeed in the electric space. Therefore, we are intensifying our efforts in this area. However, we will not be breaking out our SG&A. Some of the additional spending was already visible in Q2 and will continue over the next few quarters. We will provide more details on this in future quarters.

All right. Thanks, everyone. We appreciate your interest in Harley-Davidson. And I hope you all have a fantastic day.

Thank you. That concludes today's conference. Thank you all for joining. You may now disconnect.