Harley-Davidson, Inc. Q3 FY2021 Earnings Call

Thank you for your patience, and welcome to the 2021 Third Quarter Investor and Analyst Conference Call. I will now turn the call over to your speaker today, Mr. Shawn Collins. Please proceed, sir.

Thank you. Good morning, everyone. This is Shawn Collins, the new Director of Investor Relations at Harley-Davidson. You can access the slides supporting today's call on the Internet at investor.harley-davidson.com. 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; and CFO, Gina Goetter. In addition, Chief Commercial Officer, Edel O’Sullivan, will join for the Q&A. With that, Jochen, why don't we get started?

Thanks, Shawn, and welcome to the team. I also want to thank Shannon Burns for his great work in Investor Relations over the past three years as we moved to a new financial structure as part of our LiveWire division. Good morning, everyone, and thank you for joining us today. We delivered a solid quarter and are pleased with our year-to-date performance, where you see many proof points that our Hardwire strategic initiatives are setting up a solid foundation for future growth at Harley-Davidson. As part of the Hardwire strategy, we will focus on profitably driving our core business. Through 2021, we've been encouraged by the recovery of the tooling market. Grand American Touring is at the core of our mission and our brand. We are committed to expanding our share in this segment and see potential for future growth. By selectively targeting high-potential categories such as Adventure Touring with Pan America and Sport with Sportster, we are also maintaining our focus on long-term profitability that aligns with our brand and product capabilities. The increased demand that we are seeing across both our core and expanding categories underscores the momentum behind the Harley-Davidson brand and our pursuit of Freedom and Adventure. We've also seen interest increasing among new riders with a marked increase in participation in the Harley-Davidson Riding Academy. Through September, we've seen Riding Academy participation and completion increased 20% over 2019. In addition to our strategic changes as part of our streamlined market strategy, market headwinds include a variety of challenges from supply chain shortages to congestion at ports and increased shipping times that are impacting our production and our supplies in Q3, particularly in our international markets. These supply chain challenges are likely to continue into 2022. Our team remains committed to managing the effects of the disruption, leveraging the scale of our global network and infrastructure to mitigate the impact on our business. That said, I'm very excited about the global potential of the Harley-Davidson brand in the coming years. As we focus on more profitable motorcycle units as part of our strategy, we continue our journey towards a more efficient use of inventory. While we are below our intended inventory strategy, we've seen our dealer community adapt, improve their profitability, and therefore, improve the overall health of our dealer network. I'll now hand over to Gina to provide more details on our financial performance for the quarter and year-to-date. Gina?

Thank you, Jochen, and hello, everyone. Third quarter results reflect continued demand momentum as evidenced by our strong wholesale unit growth and share performance across the market. As Jochen said, we did experience increased supplier volatility, which impacted our production and supply levels for the quarter. Despite this, our financial results demonstrate our agility in maximizing profitability, including the execution of a pricing surcharge in the U.S., optimizing production schedules to prioritize our most profitable models, and enacting tighter operating expense controls. In the quarter, total revenue of $1.4 billion was 17% ahead of last year, driven by increased shipments and a favorable motorcycle unit mix, primarily from actions undertaken as part of the Rewire. Total operating income of $204 million was better than last year, with growth across both of our reported segments. The Motorcycle segment, which includes our General Merchandise and Parts & Accessories products, delivered $98 million of operating income, which is $51 million better than last year. The Financial Services segment delivered $107 million of operating income, which is a $15 million improvement from last year. Third quarter GAAP earnings per share of $1.05 is $0.78 better than last year, or up 35% year-over-year. When excluding the impact of EU tariffs and restructuring charges, our adjusted EPS was $1.18, which represents an increase of 12% year-over-year. Looking at Q3 year-to-date results, revenue of $4.3 billion is 30% ahead of 2020, and operating income of $831 million was $701 million better than last year. Year-to-date results reflect the strong unit growth over the pandemic-impacted results of 2020 as well as the positive impact from last year's Rewire actions. GAAP year-to-date earnings per share was $4.06, up $3.42 from a year ago, while adjusted earnings per share was $4.29, up $3.10 from last year. Global retail sales of new motorcycles were down 6% in the quarter, with growth in North America offset by declines in international markets. North America Q3 retail sales were up 2% versus last year, driven primarily by 5% growth in Grand American Touring, our most profitable segment, and the successful launches of Pan America and Sportster. Pan America maintained its status as the #1 selling Adventure Touring model in the U.S. since its launch earlier this year, capturing a 16% market share in the third quarter in the rapidly growing Adventure Touring segment. The all-new Sportster motorcycles began shipping to dealers late in Q3, and we have seen very strong sell-through to date. In our international markets, retail sales declines were primarily driven by the actions taken during Rewire to exit markets and prune unprofitable models. EMEA and APAC sales were disproportionately impacted by the decision to exit unprofitable Street and legacy Sportster bikes. In Latin America, declines from model pruning and market exits were accompanied by pricing actions taken across select models. Through these actions, the Latin America region has improved their profitability, which we expect will set up a solid foundation for future growth. Worldwide retail inventory of new motorcycles was down 35% versus last year and relatively flat to the previous quarter. Q3 inventory has been impacted by stronger demand in the U.S. as well as supplier challenges, which affected our ability to produce at planned levels. While inventory levels are lower than our original plan, we have seen improvement in desirability as measured by stronger pricing dynamics across both new and used motorcycles, and strong dealer profitability. International markets continue to be affected more profoundly by global transport challenges, resulting in higher costs and longer ship times to key ports. Looking at revenue, the total Motorcycle segment revenue was up 20% in Q3 and up 36% on a year-to-date basis. In terms of current quarter activity, 9 points of growth came from higher year-over-year volume for motorcycle units, including the new Pan America and Sportster motorcycles, 8 points of growth from mix, driven by a larger percentage of touring bikes in the quarter, and reductions across legacy Sportster and Street, 2 points of growth from pricing and incentives. During the quarter, we increased the pricing surcharge in the U.S. from an average of 2% taken in Q2 to 3.5% to partially offset raw material inflation. Finally, 1 point of growth came from foreign exchange. Q3 gross margin percent of 26.7% was down 3 percentage points versus the prior year. Our margin benefit from stronger volume, profitable mix, and pricing was more than offset by negative cost headwinds across the supply chain and higher EU tariffs. Q3 operating margin finished at 8.4%, and was up 3.6 percentage points over the prior year. The positive margin benefit from volume, mix, pricing, and reduced restructuring expense was able to offset the negative gross margin drivers mentioned. Year-to-date operating margin significantly exceeded last year, given the COVID impact, and it is also 4.6 points ahead of 2019. Despite an absolute unit decline versus 2019, profit per unit has improved behind stronger mix, pricing, lower incentives, and a lower cost structure. These results validate the efforts taken during the Rewire and have set up a more profitable foundation for future growth. As mentioned previously, the global supply chain remains volatile not only for our business but across the global manufacturing sector. Our team has continued to do a great job navigating through the unprecedented challenges and demonstrating agility in managing production schedules to optimize output. We have continued to see rising inflation within raw materials and freight costs, and we are forecasting this to continue at least through the balance of the year. To provide additional insight into the supply chain, I will refer you to Slide 9 which details our cost-to-sales mix as well as the estimated inflation impact across the major components. As you can see, logistics costs began to increase early in the year and peaked in Q2 at 2.5 times our prior year cost before settling down a bit in Q3 at 2 times prior year. Q3 was better than Q2 as we moved past the cost incurred with our 3PL conversion in North America. Materials and components cost inflation accelerated through the third quarter where we experienced a 6% to 7% increase compared to last year. This includes the cost of raw materials and higher costs of purchased components. Finally, manufacturing inflation, which includes labor costs, has been relatively consistent throughout the year at 3%. We expect continued inflation pressure across all three categories in the fourth quarter at similar levels to those seen in Q3. The Financial Services segment operating income in Q3 was $107 million, which is up $15 million compared to last year, primarily driven by $23 million of interest expense favorability. HDFS' retail credit loss ratio remained historically low at 0.84%, a 56 basis point improvement over last year. Overall retail delinquency rates have been positively impacted by improved economic conditions and the benefits provided to individuals under the federal stimulus packages earlier this year. Delinquency rates have continued to run much lower than pre-pandemic historic levels. While we do expect delinquency rates to normalize over time, we believe losses will continue to remain lower in the short term. Looking at HDFS' base business, retail originations in Q3 were up 13% versus last year behind strong new and used motorcycle origination volume. As a result, ending retail finance receivables in Q3 were $6.7 billion, which is up 2.2% from last year. Additionally, the retail allowance for credit losses at the end of Q3 was 5.1%, which is flat sequentially and down from 5.9% at the end of Q3 last year. A year ago, the U.S. economy was restrained by the pandemic, which is reflected in the higher allowance rate. While today's allowance rate has improved compared to the 2020 peaks, it is still above pre-pandemic levels given the continued uncertainty surrounding the pace of economic recovery. Wrapping up with Harley-Davidson, Inc. financial results, we delivered year-to-date operating cash flow of $926 million, down $210 million from the year-over-year period. The key driver of unfavorable cash flow was an increase in wholesale finance receivable originations. Total cash and cash equivalents ended the quarter at $2.1 billion, which is $1.5 billion lower than Q3 last year as we worked down higher cash balances held due to the pandemic. As we look to the balance of the year, we are maintaining our guidance on the Motorcycles segment revenue growth of 30% to 35%. We are also maintaining our GAAP Motorcycles segment operating income margin guidance of 6% to 8%, which includes the full impact of the incremental EU tariffs and the supply chain inflation outlined earlier. Our estimated EU tariff impact for 2021 has been adjusted to approximately $64 million, in line with our unit forecast. We are lowering our capital expenditures guidance to $135 million to $150 million from the previously communicated range of $190 million to $220 million. This change is driven by tighter cash management across projects as well as alterations in the cash flow phasing across key initiatives. Lastly, we are increasing the Financial Services segment operating income growth guidance to 95% to 105%, an increase from the previously communicated range of 75% to 85%. The improved outlook accounts for year-to-date loss favorability, reserve releases early in the year, and our outlook for Q4. Cash allocation priorities will remain to first fund growth through the Hardwire initiatives, then to pay dividends, and the company may also choose to execute discretionary share repurchases in 2021 and 2022. Looking ahead to the fourth quarter, on Slide 14, there are a few known and expected factors to consider regarding our revenue and profitability. First, as we've discussed, we will be shifting our motorcycle production in the middle of the quarter to begin producing the 2022 model year products. While we will continue to run the plants, this dynamic will limit the amount of wholesale shipments and revenue during the fourth quarter as bike builds will go into company-owned inventory ahead of the model year launch. We expect the financial impact to closely resemble the impact we saw last year in Q4. Other Q4 factors include higher expected expenses and capital spending to support upcoming launches and marketing campaigns. As previously mentioned, we also anticipate experiencing supply chain inflation consistent with what we encountered in Q3. This will be slightly offset by lower Q4 restructuring spending compared to last year. Restructuring charges in Q4 2021 will not be material, and we no longer plan to spend the $20 million full-year estimate mentioned in previous quarters. At this point, I'll turn it back to Jochen, who will take us through our progress executing against our Hardwire strategic plan.

Thank you, Gina. As we pursue our Hardwire goals, we continue to enhance our organization and processes, focusing on alignment and efficiency. Underpinned by our drive to win as a team, which is the basis for our culture, we will look to ensure that Harley-Davidson as a company and as a brand is getting stronger than ever and is positioned for long-term success. As ever, my thanks go to the whole Harley-Davidson team for all their hard work. By designing, engineering, and building the most desirable motorcycles in the world, reflected in quality, innovation, and craftsmanship, we continue to further our legacy as the only American motorcycle brand with 118 years of uninterrupted heritage. As you know, desirability provides the framework for our Hardwire strategic plan, our five-year roadmap to both enhance and grow our position as the most desirable motorcycle brand in the world. Desirability not only impacts those new to our sport and our brands, but also our dedicated community of riders and non-riders alike. We recognize that the post-pandemic conversations around motorcycling have changed, and we also see a rider base that has a desire to escape, explore the outdoors, and rediscover a passion for riding, all of which aligns with Harley-Davidson's mission of delivering freedom for the soul in the pursuit of adventure. Desirability is also a motivating factor for getting people into the sport. We know there are plenty of people interested in riding, but more importantly, interested in riding Harley-Davidson. The Harley-Davidson Riding Academy is an important way in which we build ridership and deepen our connection with our customers. Currently, we are focused on North America, but we have plans to take the H-D Riding Academy to high-potential markets across the globe, including China, where we see great potential to leverage our plant and introduce new riders to the sport. We're also mindful of the need for providers to hold their riding skills as part of their journey in pursuit of adventure. The latest offering from the Harley-Davidson Riding Academy, therefore, is the Adventure Touring rider course, specifically designed to complement our Pan America motorcycle. This course, which we are planning to expand strategically over time, offers a perfect experience for new and existing Adventure Touring riders, providing the skills and knowledge to get more out of the off-road experience while prioritizing rider safety. With improved market conditions, we've seen a growing consumer appetite for our brand and our iconic motorcycles, including the new products we launched this year. Since launching Hardwire, we've experienced strong demand for our products and our brand, specifically in our strongest and most profitable segments. Despite the ongoing impact of the pandemic and related supply chain challenges, we can see the potential of our streamlined market strategy as we maintain a long-term focus on profitable growth, aligned with our Hardwire ambitions. As we continue to execute against our strategy of 70-20-10, skewed towards our stronghold segments of Touring, large Cruiser, and Trike, we remain guided by our commitment to two critical conditions: profitable segments delivering volume margin and potential; and segments aligned with our brand capabilities, with a clear path to leadership. In these segments, we will work hard to continue solidifying and growing our position as leaders, acknowledging that these segments are the most attractive in the global market in terms of profit focus. Another component of the Hardwire is selective expansion. This also allows us to target segments that deliver a balanced combination of volume, margin, and growth potential that are aligned with our brand capabilities and identity. Well-supported by the right allocation of time, energy, talent, and the right investments in products, brands, and go-to-market capabilities. In February this year, we launched our first Adventure Touring motorcycle, the Pan America. Drawing inspiration from our heritage, we aimed to create a motorcycle that would redefine the category. The Pan America is squarely built on our mission to deliver adventure for our riders on and off the road. The performance of the Pan America has recently been demonstrated by a group of riders who reached the summit of the Khardung La in the Himalayas, the highest unpaved motorable road in the world at over 18,600 feet, creating a first for Harley-Davidson. This quarter saw the Pan America 1250 Special become the #1 selling adventure model in the United States, an accolade we are very proud of. We believe we will continue to grow the category in North America, and the potential of the Pan America across the world is significant. For example, in North America, the category accounts for 5% of the overall market and has grown 51% since 2017. In Europe, Adventure Touring currently represents 33% of the motorcycle market as a whole, growing 33% since 2018, and we believe it's still growing. We see a great opportunity to build on the success of the Pan America in the first six months in the market and look to win in Europe and further afield, targeting new Harley-Davidson riders in the Adventure Touring space. In July, we also launched the latest incarnation of the iconic Sportster, the Sportster S, at our Global Reveal event. Building on our Revolution X platform, the Sportster S has set new performance standards for the line and has received exceptional welcome in the market. The media response to the Sportster S has been overwhelmingly positive, with motorcycle.com praising the Revolution X as their new favorite motorcycle engine and calling the bike a pillar of Harley-Davidson cool. At launch, we saw one of the largest engagement rates in our Harley-Davidson social channels. We have been pleased to see this excitement translating into orders, with the Sportster S allocation being sold out through our integrated pre-approved order system. With our preorder system, our dealers can effectively create an integrated reservation system, providing a direct line of communication to work through manufacturing allocations and improving the overall dealer visibility on orders. In Q4 of this year, Harley-Davidson will officially launch a reservation process in the U.S. and Canada to capture early demand on select 2022 models. This process will provide a consistent experience both on harley-davidson.com and at the dealership network, allowing dealers to engage with customers on configuring and customizing new motorcycles, keeping them notified of expected delivery, and informing future enhancements that strengthen and support the Harley-Davidson community online and on the road. It is our ambition to put our customers at the forefront of everything we do, aligned with our Hardwire goals. By facilitating early engagement between dealers and customers, we're investing in strengthening this critical relationship through new and integrated tools that we are creating. For dealers, we believe this new reservation process will improve the sell-through rate, and for Harley-Davidson, it will ensure production better matches customer demand. We are excited to see the Sportster S make its way into the hands of our customers around the world and look forward to this new generation of Sportster hitting the streets in full force. As evidenced by its strong performance this quarter, HDFS is a strategic asset with existing growth in delivery and profitability. With HDFS, Harley-Davidson is uniquely positioned to offer our customers valuable financing options for their motorcycles, with over 65% of Harley-Davidson motorcycle sales financed by HDFS. Going forward, our goal is to make HDFS the preferred choice for all Harley-Davidson riders by building new capabilities that drive innovation in financial services. HDFS is integral to the Harley-Davidson success, and with a planned expansion in Europe in the near to medium term, I'm excited about its future. With the H-D1 marketplace and HDFS, we intend to change the face of the online marketplace for pre-owned Harley-Davidson motorcycles, blending the best of digital and in-dealer experiences aligned to our Hardwire priorities. Since launching, the H-D1 marketplace has become the go-to online Harley-Davidson marketplace for dealer-based listings, featuring the largest selection of dealer pre-owned Harley-Davidson motorcycles in the United States, including the largest selection of H-D certified motorcycles, ensuring the ultimate choice in pre-owned. We've seen the power of the H-D certified program, driving desirability and enhancing the overall consumer experience while providing customers with extra confidence in their purchases. As of this month, the H-D1 marketplace features over 25,000 pre-owned Harley-Davidson motorcycle listings, 1,200 Harley-Davidson certified motorcycles, over 500,000 units used since launch, and over 550 participating U.S. Harley-Davidson dealers. Backed by the strength of our dealer network, we want to continue to ensure that our riders have access to the largest selection of the best Harley-Davidson motorcycles. We believe the H-D1 marketplace will drive connectivity and engagement with our Harley-Davidson customers and dealers, acknowledging the important role that pre-owned Harley-Davidson riders play in our community. For over a decade, Harley-Davidson has produced and published annual sustainability reports ahead of many in our sector. Over that time, we have made solid progress. This progress has reinforced the importance of inclusive stakeholder management as a key partner in recognizing that our future will be defined not just by our product and experiences, but also how we deliver value for all our stakeholders. In publishing our 2020 inclusive stakeholder management report, we made a commitment to create a high-performing, engaged, and diverse workforce, create an inclusive and more sustainable dealer network and supply base, create a path to net-zero environmental impact by 2050 at the latest, deliver positive impact in our communities, and align the rewards for our stakeholders with our shareholders. By making inclusive stakeholder management a key part of our strategy, we are prioritizing long-term profitable growth and value for our stakeholders, our communities, our people, and our planet. I invite you all to read our report for more detailed insights. Through the quarter and year-to-date, we've seen many of our Hardwire strategic initiatives perform well against our expectations, indicating the initial proof points of our five-year strategy. I believe there is tremendous potential for our brand and business globally, and we will not rest until we establish ourselves as best-in-class in every market segment in which we compete. In closing, before we go to questions, I would also like to provide a brief update on the EU tariff situation as it affects our company. As negotiations between the U.S. and EU continue, we are optimistic that a resolution will be found. We've been especially encouraged by positive media reporting on the negotiations that we've seen over the past few weeks. We've actively engaged with both the U.S. administration and the EU. As we've said throughout, we believe that Harley-Davidson has no place in this political dispute that is not of our making. Thank you, and now we'll take your questions.

Your first question comes from Robert Ohmes from Bank of America.

And congrats on a strong quarter in what is obviously a really tough environment for a lot of companies out there. My one question is on the pricing outlook. You spoke a lot about the average price per motorcycle obviously has gone up maybe more than we were modeling in support of the quarter, the surcharges to dealers you guys did. Can you maybe comment about what the pricing outlook could look like next year for Harley-Davidson with the new models, and will some of these surcharges become sort of a higher level of pricing going forward?

Thank you for the question. As you know, we took several pricing actions over the course of the past few months, and we are actively assessing their impact as we go forward. That is certainly part of what we are looking into for 2022. We remain committed to managing the profitability and the desirability of our motorcycles, so that is certainly part of the efforts across all our product lines as we look to 2022.

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

I was glad to hear that Edel will be available for questions because I wanted to ask her something related. Edel, can you discuss the progress in reshaping the general merchandise program and what has been happening with your SKU reduction? Are you achieving better productivity? Please share where we stand in that process.

Yes. Thank you for the question. As you know, we're on a journey with our general merchandise business, which we think is an enormous untapped opportunity for Harley-Davidson as a whole. As Jochen has referenced in his previous commentary, and as we talk about the Hardwire strategy, the brand opportunity and the power that exists for Harley-Davidson as both an apparel business and more broadly as a lifestyle brand is significant and one that we intend to tap into over the course of the Hardwire initiative and beyond. In terms of actions taken to date, you will note that we have increased our seasonal offering of products to bring more freshness into our dealer channel to drive more traffic into the dealership. We continue to invest in expanding our e-commerce capabilities so that we can offer more choice to our customers as they look across channels and how to engage with us. Going forward, we intend to continue expanding the range and quality of our products and to grow what is a significant part of our business, inviting apparel specifically, while other motorcycle volume continues to grow and diversify over the coming years. We see enormous opportunities linked directly to motorcycles and to riding apparel, beyond that as we expand into lifestyle categories. We believe Harley-Davidson is particularly well-suited to capture these opportunities.

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

Shawn, congratulations on your new role. It has to do with this new reservation system that sounds promising. I'm wondering if you have any way to estimate the missed retail opportunity in Q3 because of the inventory shortage? Is there any way to frame maybe what you lost there? And then as it relates to the reservation system, what are some of the dynamics there? Will consumers be expected to put money down in order to reserve a slot?

So first, let me address the second part of your question around the impact in Q3. If we think that there has been a volume loss, it is complicated by various factors as we look back to perhaps 2019, given that 2020 was such a unique year. There are significant changes that have occurred as part of the Hardwire strategy. So Gina referenced some of these market exits and new product introductions, etc. Furthermore, there have been significant changes in the environment around us, including how we think about inventory and how our dealers are operating more efficiently with the inventory that they have. It is fair to say that, as we look across all those factors, and as we consider what we are hearing from our dealers, there has been some volume loss or some market demand that we have not been able to fulfill in Q3. This brings me to the reservation system, which is intended to address that. Our main goal is to ensure that our dealers can meet customer demand as they walk in the door, ensuring that nobody leaves a dealership without being satisfied or knowing when they can have the product they desire. The reservation system allows us to start that dialogue with the customer to establish exactly what product interests them, enabling dealers to engage with customers along that journey. Not only will it offer the opportunity to customize and engage with the product, but it will also provide better visibility into where that product lands in the production schedule. Ultimately, this will allow us to target that demand more specifically, ensuring that customers can get what they want as part of this process. So it is incredibly exciting for us. I think it will build upon processes we've established before that our dealers are well familiar with while ensuring we can meet customer demand in this environment.

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

I wanted to ask about the Pan America, which is obviously off to a very strong start. Congratulations on the early success there. Given that early success, how do you invest behind that at this point? You talked about the European market for Adventure Touring. Can you elaborate further on how you see that opportunity from a timing standpoint and what your expectations will be to take advantage of that and generate penetration into that market?

I'm pleased to share that the launch has been extremely successful. The marketing for our new product, the Pan America, has resonated well with both current riders and new customers. We've made our marketing materials available on YouTube and collaborated with bloggers and others to review our bike. We also held riding academies featuring the bike, which helped us gain significant momentum. Currently, nearly every Pan America is sold out. Recently, we had an extra 50 units available, which sold out in about five minutes. There is strong demand for the Pan America, and our marketing efforts are effectively generating excitement and attracting new customers. Notably, around half of our customers are existing Harley owners, while the other half are new to the brand. We're achieving our objectives with this bike not just in the U.S., but also in European and Asian markets where we see substantial potential. As I mentioned earlier, we believe there is an opportunity to grow this category in the U.S. based on the momentum we've established over the last few months. In Europe, the Adventure Touring market is significantly larger, and we expect to capture market share from competitors because we have a genuinely competitive product. We plan to encourage people to ride our product, as that is the best way to engage customers. Relying solely on traditional advertising will not be effective, but getting people to ride and review our bikes will produce positive results while providing a uniquely tailored Harley experience in a market we have not previously entered. Overall, we have a clear strategy in place and are committed to executing it, recognizing the considerable potential for unit sales moving forward.

Your next question comes from the line of Jamie Katz from Morningstar.

This is Jamie. I have a question on CapEx and the revised spending. My understanding, and maybe this is incorrect, is that this is a temporary step-down in CapEx, but that the Hardwire plan is still $190 million to $250 million a year. If this is the case, what was pruned back in 2021, and will some of that be pushed into 2022 for some of those projects?

Jamie, this is Gina. Thanks for the question. From a capital standpoint, as we look out beyond '21 and into '22, we do not see that guidance changing at this point. The change that we made this quarter reflects, one, just some timing of when that cash flow will hit. So all initiatives are still in motion; it's just a reflection of when that timing is expected. Additionally, compared to capital versus expense dollars, there were adjustments to how those funds are allocated within the P&L. Overall, initiatives remain on track for this year as part of Hardwire, and as we look beyond '21, the capital guidance has not changed.

Your next question comes from the line of Joe Altobello from Raymond James.

I just want to go back to dealer inventory. Pre-COVID, you guys had typically around 15 weeks in the channel. Your intent, obviously, was to bring that down. Even if we cut that in half, I think you’re at about 7 weeks right now, but it seems to have overshot your target. What's the right level of inventory you want to see in the channel? Is it somewhere in between, call it, 11 weeks going forward?

We wouldn't want to comment on specific levels, as there are many factors involved. Overall, we are certainly lighter than we would like to be. This ties into a previous question about our ability to meet market demand. This is entirely driven by challenges we have faced in the supply chain that have been noted, and we expect this to continue into 2022. We are working to align supply with demand while aiming to improve efficiency going forward, utilizing the lessons we've learned in 2021. While we believe our inventory is currently light, we intend to manage it effectively as we come into the new year.

Your next question comes from the line of James Hardiman from Wedbush Securities.

I have a question about the guidance, particularly the margin guidance. You've kept it at 6% to 8% for the year, and now that we're three quarters in, the implied guidance for the range for Q4 seems broad. Can we assume we'll be at the high end of that range by the end of the year? Regarding the supply chain, I appreciated Slide 9 and how you detailed the components. Can you help us understand the extent of the impact that has on your margins this year?

Perfect. James, this is Gina. I'll address the second part of your question first. As we moved through Q2 to Q3, we did see the broad supply chain environment worsen. Numerically, the impact on our margin structure was relatively the same. When we talked last quarter, we estimated about 5 margin points of inflation impacting the P&L between logistics and raw materials. As we moved into Q3, we saw that same 5 points affect the P&L, but in different areas. Logistics showed slight improvement, but the broader raw material and supplier component inflation worsened. From an operational standpoint, the logistical environment stayed tough with no material improvement but similar conditions played out on the supplier side, making it more challenging to manage. Our team is handling everything well to keep our suppliers on track and ensure consistency in operations. No material plant shutdowns have occurred, which is positive. As we focus on Q4, we plan to maintain a similar outlook regarding inflation as we experienced in Q3. For margin guidance of 6% to 8%, that has been factored into our analysis. I'm not going to comment on if we'll be at the high or low end, but we're confident in the guidance we provided, despite the ongoing volatility in the supply chain.

Your next question comes from the line of Billy Kovanis from Morgan Stanley.

Two questions. One, Jochen, what are the sort of one or two areas of bright spots that you see that you have visibility on that the market may be missing, like one or two things that you're excited about? Secondly, Gina, just a question on HDFS and operational income in 2022; can you provide any color on the trajectory given the sort of growth this year of around 100% at the midpoint of your guidance? What does that look like next year?

Yes. Thanks, Billy. Good question. I keep asking myself that question. There are more than a few bright spots, and I've highlighted some of them today and in the last quarter. I think we are executing extremely well according to our Hardwire strategy, better than expected. However, we also have to bear in mind the tactical challenges with supply which are significant. But at the same time, we are executing effectively on our long-term strategies. I believe there are several bright spots, including our new products that we've launched, with Sportster, Pan America, and other model year products, our new Icons Collection, institutional pursuits for LiveWire as a separate division, and many positive developments taking place in the first nine months of the year. Overall, I would say we are executing exceedingly well across the board based on our strategy.

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

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

This concludes today's conference call.

Thank you, everybody.

Thank you for participating. You may now disconnect.