Harley-Davidson, Inc. Q2 FY2024 Earnings Call

Thank you for standing by and welcome to the Harley-Davidson 2024 Second 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 Shawn Collins. Thank you. Please go ahead.

Thank you. Good morning. This is Shawn 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 risks that could cause actual results to be materially different. Those risks include, among others, matters we have noted in today's earnings release and in our latest filings with the SEC. Joining me for this morning's call are Harley-Davidson Chief Executive Officer, Jochen Zeitz; also Chief Financial Officer, Jonathan Root; and we have LiveWire's Chief Executive Officer, Karim Donnez. With that, let me turn it over to our CEO, Jochen Zeitz. Jochen?

Thank you, Shawn, and good morning everyone. Thank you for joining us for our Q2 2024 results. In Q2, consolidated revenue was up 12% driven by revenue growth of 13% at HDMC and 10% at HDFS. Additionally, we saw a strong improvement in earnings per share to $1.63 for the quarter. Consolidated operating income in the second quarter was $241 million, up 9% from the prior year, driven largely by an increase of 21% at HDFS. In addition, HDMC operating income was up 2% and the operating loss of LiveWire was $4 million less than a year ago. Through the quarter we saw the continued impact of the high interest rate environment affecting our industry, and in particular big-ticket consumer discretionary sectors. That said, retail sales of new motorcycles in the U.S. were still slightly positive versus the prior year, with a varying degree of performance from state to state. Turning to our global performance, it's important to note that we see a mixed picture also across our international markets. In EMEA, retail sales declined by 1%, with certain markets in Central Europe underperforming while others overperformed. And in Asia Pacific, Q2 retail sales declined by 16% driven by weakness primarily in China. North America, including Canada was down 1% and Latin America was flat. Looking ahead, we're narrowing our retail and wholesale expectations to reflect the current environment. We continue to expect that retail units sold and wholesale unit shipments will be balanced by the end of '24. Dealer inventory should be at similar levels as at the end of last year. This implies a reduction in dealer inventory of approximately 30% versus current levels. This should allow our network to take advantage of opportunities in the market. Being mindful and supporting dealer health following the record levels of profitability in '21 and '22, we expect these shipment reductions to positively impact dealers' floor plan expenses. Our performance in the first half of the year continues to be aligned to our Hardwire strategic pillar, Profit Focus, with strong mix and notable growth in touring, especially CVO models, despite the challenging market environment in the overall industry. Building on our commitment to invest in our core categories, we've been extremely pleased with the strong response to our new era of touring motorcycles with our '24 in Road Glide and CVO offerings. The product continues to receive a strong reception in the market from the industry, customers, dealers, and media alike as it grows awareness globally. Additionally, in the U.S., we saw strong gains in share in the 601+CC market against the backdrop of an overall declining industry in Q2 and year-to-date, while Harley-Davidson touring was up 5.3 percentage points in share and over 11% in unit growth. As we look at our customers, our insights tell us that performance is an increasingly important part of being a Harley-Davidson rider, with 44% of riders considering performance to be the most important feature when purchasing, 73% of owners thinking it's important to own a performance-related motorcycle, and over 80% of owners seeing an increase in attention paid to performance. Through our involvement in the King of the Baggers racing series, with Harley-Davidson riders holding the first and third place on the leadership for this season, we continue to celebrate and emphasize performance as a key differentiator for the Harley-Davidson line-up. This performance has continued to be popular with riders, as seen by the strong performance of our ST offering. In addition, we selectively focus on opportunities in segments that we believe have a path to in-market success and profitability, capitalizing on our brand strength and product capabilities, and selectively complementing with partnerships. Looking at our partnership with Hero, we continue to be pleased with the reception that the X440 has received since launch, and we look forward to exploring further opportunities. LiveWire is pioneering the industry for EV motorcycles. However, we are realistic about the overall environment, especially in the U.S. As we detailed last quarter, we plan to continue improving our investments and driving cost productivity at LiveWire, as you'll hear from Karim. That said, we're also further committing to support LiveWire in lowering the breakeven point. We expect further cost reductions to adjust to the overall market environment and to reduce the cash burn of the business in the future. I also wanted to highlight the recent Department of Energy grant of $89 million that Harley-Davidson was awarded to invest in our facility in York, Pennsylvania, to support its overall operations, as well as the manufacture of EV motorcycles for LiveWire. This grant is specifically targeted to strengthen and help expand Harley-Davidson's manufacturing facility in York to incorporate new paint and assembly equipment, supporting the manufacturing of all of its motorcycles and training of our union workforce, all while providing meaningful community and workforce enhancements. We look forward to working with the Department of Energy to realize this investment into the York facility. Harley-Davidson Financial Services, or HDFS, delivered a strong quarter with a meaningful $23 million or 10% revenue increase in Q2. This was primarily driven by higher retail and commercial finance receivables, as well as higher average yields as the portfolio continued to reset over time. Thanks to growing penetration today, roughly 70% of new and used Harley-Davidson motorcycles are being financed through HDFS in North America. But crucially, HDFS allows us to understand our customers better through the unique insights and customer dynamics that we've access to. One of those insights that I'd like to call out today is our average customer profile. As we look back through our HDFS data over the past, we are able to see that the average age of our customers purchasing a motorcycle, used and new, is about 45. This is a fact-based metric that stands in contrast to the narrative that has been perpetuated by some commentators. As you can see in the slide that we provided as part of this presentation, the average age has not moved significantly in the last 10 years and even much beyond. In addition, nearly 30% of HDFS loan originations in the past 5 years were made to customers 35 and younger, with 75% being 54 or under. Given the average MSRP and the segments we compete in, we continue to expect our customer to age into our product while building brand awareness and desirability, starting at a much younger age, helped by all our efforts to build new and keep existing riders riding as part of our Hardwire strategy. With that said, the Hardwire puts customers at the forefront of Harley-Davidson's products and experiences and defines customers as people who may dream of motorcycling or just learn to ride a Harley-Davidson motorcycle, all the way to riders who are deeply passionate about and invested in the Harley-Davidson lifestyle and community. Within Harley-Davidson experiences, we could recognize the important role that events play in bringing our community together. This is especially true with our Harley Owners Group. Earlier this year in Senigallia, Italy, we hosted the 30th European H.O.G. Rally. This exceeded all our expectations, with an estimated 100,000 fans and Harley Owners Group members attending, and over 20,000 motorcycles visiting from Europe and beyond. In addition to the many events happening in riding season around the world, we also had a significant presence at Laconia and Born Free, celebrating our customers that are typically younger than our average age. Today sees us kick off our second annual homecoming festival right here in our hometown. We're excited to welcome our community to Milwaukee. Events will be held across our footprint here in the city at our Museum, Product Development Center, and Juneau Avenue headquarters, including Davidson Park that the Harley-Davidson Foundation formally unveiled just recently. With headliners including Jelly Roll and the Red Hot Chili Peppers performing at Veterans Park, it's going to be a weekend to remember. Now, before I turn it over to Karim, I'd like to comment briefly on our performance since initiation of the Hardwire and subsequent Hardwire II. Despite the challenging environment, we are pleased with the progress we've continued to make in executing our strategy as we progress towards generating value for our shareholders over the long term. We continue to believe there's meaningful growth potential for the company, and we remain focused on realizing that opportunity. We will continue to pursue delivery of our strategic pillars through peer focus, with plans to drive significant productivity across the business in addition to evaluating and pursuing selective opportunities and continuous product innovation to drive growth and ridership. And through this process, we will continue to evaluate our decisions when compared to the rider focus on returning surplus capital to our shareholders. With that in mind and consistent with our capital allocation decisions today, we are announcing our plan to repurchase $1 billion in shares. Details were announced in our press release that went out earlier today. The dividend policy remains unchanged and the company continues to expect the dividend for the remaining quarters of '24 to be in line with Q2 and Q1. And with that, I'll hand it over to Karim.

Thank you, Jochen. Good morning, everyone. We're happy to report that LiveWire continued to attract new riders with a triple-digit increase in LiveWire branded unit sales compared to the second quarter of 2023. Retail sales outpaced wholesale again in the second quarter, making LiveWire the number one on-road electric motorcycle retailer in the U.S for the first half of 2024. Our market presence continued to grow steadily, especially in Europe, with two models, LiveWire One and Del Mar, now in market. In late June, we also launched STACYC Electric Balance Bike in the EMEA market to broaden our product offerings and reach new customer segments. Additionally, LiveWire's operating loss improved by 12% compared to the second quarter of 2023, underscoring the company's approach in reducing costs while expanding its product line and market presence. Our cost-cutting measures are not just about reducing expenses but also about driving efficiency and ensuring that we allocate our resources to the areas that matter the most as we continue to work on offering the best value proposition to all our stakeholders, considering the current market environment. In the second half of 2024, LiveWire remains committed to continuous improvement and innovation from our product development to our manufacturing processes. We are focused on finding smart and effective ways to operate while reinforcing growth, profitability, and category leadership as priorities. And as mentioned by Jochen, we are also planning for a significant reduction in cash flow next year with stronger business fundamentals in place and expenses aligned with market reality, while continuing to drive awareness and demand. Thank you. And now I'll hand it over to Jonathan.

Thank you, Karim, and good morning to all. I plan to start on Page 5 of the presentation where I will briefly summarize the consolidated financial results for the second quarter of 2024 and subsequently I will go into further detail on each business segment. As Jochen already commented, consolidated revenue in the second quarter was up 12%, driven by HDMC revenue growth of 13% and HDFS revenue growth of 10%. Consolidated operating income in the second quarter was $241 million, up 9% from the prior year period, driven largely by an increase of 21% at HDFS. Additionally, HDMC operating income was up 2%, and the operating loss at the LiveWire segment was an improvement of $4 million compared to a year ago. The consolidated margin in the second quarter was 14.9%, which compares to 15.3% in the prior year period, where HDMC operating income margin was down 155 basis points year-over-year, and HDFS operating margin was improved by 254 basis points. I plan to go into further detail on each business segment's profit and loss drivers in the next section. Second quarter earnings per share was $1.63, up 34%, and compares to $1.22 last year. As we flip the page to first half results, total consolidated HDI revenue of $3.3 billion was up 4% compared to last year. The components of this were at HDMC, revenue increased by 3%, at HDFS, revenue increased by 11%, and at LiveWire, revenue declined by 25%. Total consolidated HDI operating income was $504 million, which was $87 million lower than the prior year. The components of this were, at HDMC, operating income of $436 million was 18% lower than the prior year, reflecting an operating margin of 15.4% in the first half of the year. At HDFS, operating income of $125 million increased by 7% in the first half of the year. And at LiveWire, an operating loss of $57 million was in line with our expectations. Year-to-date earnings per share was $3.34, up 2% and compares to $3.27 last year. Let me turn to Slide 7, and I will aim to be brief here as Jochen earlier provided commentary on both Q2 retail performance by region and recent market share highlights. Dealer inventory at the end of Q2 is up from the levels at the end of Q2, 2023, and just slightly down versus levels at the end of Q1, 2024. We believe current dealer inventory and product availability are in largely healthy positions overall as we are in the midst of the important summer riding season in North America and Europe. We continue to prioritize availability and inventory of Touring, Trike, Softail, and CVO motorcycles and ensure our dealers have an appropriate supply. We will talk further about our expectations for both retail and wholesale motorcycles in just a few minutes. Looking at revenue, HDMC revenue increased by 13% in Q2, focusing on the key drivers for the quarter. 11 points of growth came from increased wholesale volume at HDMC, where motorcycle shipments in the quarter were ahead of last year by 16%. Whereas Q2 2023 shipments were adversely impacted by an unplanned production suspension at our U.S. manufacturing operations. 4 points of decline came from pricing, which includes the impacts of the pricing surcharge elimination, other pricing actions on 2024 model year and sales incentives for only our model year 2023 motorcycles. Mix contributed 7 points of growth as we continued to prioritize our most profitable models and markets. And finally, 1 point of negative impact came from foreign exchange. In Q2, HDMC gross margin was 32.1%, which compares to 34.8% in the prior year. The decrease of approximately 270 basis points was driven by lower overall pricing, inclusive of the impact of surcharge removal, higher manufacturing and other costs, and adverse impacts from foreign exchange. This was partially offset by positive impacts from volume, improved mix, and lower raw material prices. Let me provide some color on a few of the specific drivers. Pricing had the biggest adverse impact on margin where we priced the all-new touring motorcycle strategically, and we have additional incentive or promotional spend in Q2 centered on interest rate assistance to consumers on model year 2023 motorcycles only. Improved mix had the biggest positive impact on our margin where we prioritize the shipment of touring and CVO motorcycles. Lastly, foreign exchange exposure was unfavorable in Q2 with the largest impact seen in the Japanese yen and euro. In addition, we experienced around 2% of cost inflation on an annualized basis in Q2. On the operating expense side, expenses were $12 million higher relative to prior year due to higher spend on regional marketing and warranty costs. In addition, we had some employee exit charges associated with recent select headcount reductions primarily at the operating expense level. These moves were made in an effort to increase future OpEx productivity. HDMC operating margin came in at 14.7% in Q2 from 16.2% in the prior year. For the first half of the year, HDMC gross margin was 31.7%, which compares to 35.4% in the prior year's period. Operating income was $436 million, which was $94 million or 18% lower than the prior year. HDMC operating margin of 15.4% through the first half was 3.8 points lower than the prior year. The decrease was due to less favorable pricing, manufacturing, and foreign exchange. These effects were partially offset by improved mix and a modest increase in volume. In addition, year-to-date lower margin reflects the deleverage we experienced in Q1 as a result of Q1 2024 wholesale product, which was produced in Q4 of 2023, where fixed costs per unit were higher due to lower production. Lastly, in the first half, operating expenses were $13 million or 3% higher in line with previous discussion. Before we turn to the next slide, let me give a brief update on our productivity cost program. One of the initiatives identified as part of the hardwire strategy where we are driving improvement in productivity to eliminate the $400 million of incremental supply chain costs incurred in 2020. To simplify and provide more transparency, we are now excluding leverage from productivity while still holding our previously communicated multiyear target of $400 million, which originally included a benefit from leverage of between $50 million and $70 million. Maintaining the $400 million target without the positive impact of leverage is a testament to the confidence we have in our cost reduction programs. Excluding leverage, we delivered approximately $24 million in 2022 and $123 million in 2023. In 2024, we've delivered $50 million through Q2. Turning to Slide 11 now, and the Financial Services segment. At Harley-Davidson Financial Services, Q2 revenue increased by $23 million or 10% driven by higher retail and commercial finance receivables as well as higher average yields. As the portfolio continues to reset over time to the higher base rates caused by Fed rate expansion, which were driving higher interest income. HDFS operating income was $71 million up $12 million or up 21% compared to last year. The Q2 increase was driven by higher interest income and the lower provision for credit losses, which were partially offset by increased borrowing costs and higher operating expenses. Total interest expense was up $8 million or up 9% versus the prior year. The increase was driven by a higher cost of funds as lower interest rate debt matured and was replaced with current market rate debt. In Q2, HDFS's annualized retail credit loss ratio was 3.1%, which compares to an annualized retail credit loss ratio of 2.6% in Q2 2023. The increase in credit losses was driven by several factors relating to the current macroeconomic environment and the related customer and industry dynamics. In addition, the retail allowance for credit losses for the second quarter came in at 5.4%, up from 5.3% a year ago, and at the same level as the 5.4% at the end of Q1 2024. This reflects our best estimate of the current and future retail lending environment. Total retail loan originations in Q2 were down 4%. While commercial financing activities were up 52% to $1.4 billion. Total quarter end net financing receivables, including both retail loans and commercial financing, was $8 billion, which was up 7% versus the prior year. Turning to Slide 12 and the first half results at HDFS. First half revenue increased by $49 million or 11%. HDFS operating income was $125 million, up $8 million or up 7% compared to last year. The first half increase was driven by higher interest income, which more than offset higher borrowing costs, higher provision for credit losses, and higher operating expenses. For the LiveWire segment, as Karim mentioned, electric motorcycle revenue increased in the second quarter of 2024 compared to the prior year period due to higher unit sales of EV motorcycles in the quarter. At STACYC, the Electric Balance Bike business revenue was down compared to the prior year, which was expected due to a reduction in third-party branded distributor volumes. Selling, engineering, and administrative expenses were down $3 million or down 9% in Q2 compared to the prior year. LiveWire operating loss of $28 million, $4 million less than a year ago was in line with our expectations as LiveWire continued to invest in new motorcycle models and also actions initiatives to reduce the overall cost of sales for EV motorcycles. For the first half results at the LiveWire segment, revenue was $11 million, down 25% from the prior year as a result of lower revenue at STACYC, the Electric Balance Bicycle business. For the first half of the year, LiveWire sold 275 electric motorcycles, which is a triple-digit increase over the prior year period. For the period, LiveWire operating loss was $57 million, which was in line with our expectations. Wrapping up with consolidated Harley-Davidson, Inc. Financial results, we delivered $578 million of operating cash flow in the first half of 2024, which was up from $411 million in the same period last year. The increase in operating cash flow was due primarily to positive changes in working capital during the first half of 2024 compared to the first half of 2023, driven by a decrease in inventory during 2024. These positive impacts were partially offset by higher net cash outflows related to wholesale finance receivables. Total cash and cash equivalents ended at $1.8 billion, which was $327 million higher than at the end of Q2 prior year. This consolidated cash number includes $113 million at LiveWire. Additionally, as part of our capital allocation strategy and in line with our commitment to return capital to our shareholders in Q2, we bought back 2.9 million shares of our stock at a cost of $102 million. This brings our total amount of shares bought back in the first half of 2024 to 5.5 million shares of Harley-Davidson common stock at a total value of $200 million. This compares to 4.1 million shares at a total value of $156 million in the first half of 2023. We see 2024 not only as a year to balance retail sales and wholesale shipments, but also as a year to improve balance sheet efficiency. As it has become clearer that volume will be towards the lower end of our original expectations, planned production cuts in the back half of the year will be more aggressive than the reductions we envisioned for retail sales and wholesale shipments. This produces a gross margin headwind in Q3 and Q4 that is greater than we originally estimated, but we believe positions the company more appropriately for 2025, frees up additional cash, and reduces obsolescence risk on an ongoing basis. We continue to expect that retail units sold and wholesale unit shipments will be balanced by the end of 2024, and we now expect retail and wholesale to be in the range of 163,000 to 168,000 units. Retail to be in the range of flat to up 3% for the full year. Wholesale shipments to be in the range of down 7% to down 10% for the full year. As we look to guidance for the year, there are a number of elements that remain unchanged from the prior quarter, but there are some changes for HDMC and that is where I will begin. We now expect revenue to be down in the range of 5% to 9%, and this has been narrowed from our previous flat to down 9%. Operating income margin is now projected to come in between 10.6% and 11.6% rather than the 12.6% to 13.6% range that we previously guided to. The downward revision is primarily due to production and wholesale reductions, and the impact of leverage. At HDFS, guidance for the full year 2024 remains unchanged, where we expect operating income to be flat to up 5%. At LiveWire, guidance for the full year 2024 remains unchanged, where we continue to expect to deliver between 1,000 and 1,500 electric motorcycle units and an operating loss in the range of $105 million to $115 million. And we continue to expect capital investment in the range of $225 million to $250 million. As we look at capital allocation in 2024, our priorities remain to fund profitable growth with the Hardwire initiatives, which includes the capital expenditures mentioned previously, paying dividends, and continuing to execute discretionary share repurchases. As Jochen touched on, and as can be seen from our press release earlier today, we are announcing a new plan to repurchase $1 billion in shares through 2026. We feel this highlights our operating discipline, overall cash flow generation and the long-term earnings power, and is supported by our continued commitment to deliver a 15% operating income margin by the end of 2025. And with that, we'll open it up to Q&A.

Our first question comes from Craig Kennison from Baird. Please go ahead. Your line is open.

Hey, good morning. Thanks for taking my question. I guess it's a two-parter. First, what does guidance assume for retail in 2024? And then secondly, bigger picture here. This was a big year for innovation for Harley-Davidson, and all the product reviews have been really exceptional, but just not seeing the volume flow through like you might have hoped. What's your bigger picture assessment of where your consumers given you've really offered a very good product and it hasn't moved the needle as much as maybe you would like?

Yes, I will address both of your questions. For our retail guidance, we anticipate a full-year growth of between 0% and 3%. Regarding innovation, it has made a significant impact. Looking at market trends, the overall industry has faced declines in the second half, with most players seeing reductions in the high single to mid-single digits, while we have experienced a slight positive trend in the U.S. This indicates that our innovative efforts are effective. It takes time for customers to become aware of new motorcycles. Currently, about 30% of our engaged Harley-Davidson owners are aware of our new products, which leaves two-thirds still not fully informed. We believe this product will support our business for years to come, and we are very pleased with the overwhelmingly positive reception. The new bikes significantly differentiate from our previous touring models, and we have a strong product portfolio and innovation platform planned for the future. As I have mentioned previously, the bikes we launched align with the start of our Hardwire Stage II strategy, marking the start of more products to come. Overall, the exceptional reception reflects positively, especially considering the industry's performance in the second quarter.

Thank you.

Our next question comes from Alex Perry from Bank of America. Please go ahead. Your line is open.

Hi, thanks for taking my question here. The HDMC op margin came in nicely despite the gross margin pressure in the quarter. Can you just talk about sort of the second half gross margin assumption? Should we continue to expect pressure from pricing and sales incentives? And then it looks like you managed the SG&A expense line quite well. Just maybe talk about sort of what you're doing in the back half there and what we should expect there. Thank you.

Hi, Alex. So I'm happy to take that. So I think from an op margin perspective overall, we are certainly pleased in terms of where the company is performing, particularly in light of where we are from a production volume perspective. I think we've talked with you a little bit about that previously. As we think about some of the actions that we've taken as a company, we certainly are making sure that we’re kind of moving through the P&L, looking at places that we can ensure that we are intelligent in taking costs out of the business in a way that doesn't do anything to harm the long-term nature of the business and really allows us to maximize current results. We certainly have kind of instituted a little bit of belt tightening for 2024. You saw that through the employee-related costs that we talked about. As we move through the back half of the year, you obviously see some of that benefit begin to unlock from an OpEx perspective. And then in addition, we have a number of investments that we've made in the manufacturing and cost of sales side in order to ensure that we are working collaboratively with suppliers to reduce and remove costs from motorcycles in a way that is obviously transparent from a consumer perspective. And so as we look at all of that, that's where we updated our overall guide from an OI perspective. And so you see that flow into the decision that we made and what we updated.

Perfect. That's really helpful. Best of luck going forward.

Thank you.

Our next question comes from James Hardiman from Citi. Please go ahead. Your line is open.

Hey, good morning. So a couple of retail questions. How did that trend over the course of the quarter? I think we've seen across Powersports some sort of tipping point where consumers seem to be pushing back even more so than they were earlier in the year. And I guess in the context of your guidance, I think year-to-date your retail is down about 2%. And yet the full-year guidance, I think you just said, Jochen, is flat to up 3. So that seems to imply retail growth in the second half. Help us understand why you feel comfortable with that assumption, particularly as we get further away from the model year '24 launch?

Yes, good morning, James. I'll take the first question. The trend over the quarter was extraordinarily consistent, if I look at the U.S. market. We did not trend throughout the quarter in any month negative. So, very consistent if you look at the 3 months of Q2.

Sure. James, I can talk a little bit about kind of our back half view. So as we go through and we take a look at how 2023 developed and then kind of how that flows into 2024 from a year-over-year comp perspective, our toughest comp, as we’ve kind of looked back on last year was really around the way that we performed at retail in Q2. As we move into Q3 and Q4, we feel pretty confident in light of just refreshing our guidance and putting that out there. We're pretty pleased with the reaction that we've had from a CVO perspective, certainly pleased with kind of consumer and dealer reaction to Road Glide. We have good inventory availability with Trikes and things of that nature. So overall, we actually feel like we're pretty well-positioned. If you recall about 12 months ago, we were talking through some challenges that we had from a production disruption standpoint. We're really pleased with the work that's being done within our manufacturing and supply chain team. We have a lot of consistency from a manufacturing perspective. That certainly wasn't the case a year ago. So the level of confidence that we’ve as we look at the comps, and then as we look at the way that we're kind of running internally, you put all of that together and with the dealer network, we have a lot of confidence in the numbers that we put forward and what we think the back half of the year will produce.

Got it. Thanks, guys.

Our next question comes from Robin Farley from UBS. Please go ahead. Your line is open.

I have two questions regarding retail. First, it seems that your Touring market share decreased in Q2 compared to Q1. Can you provide some insight into the competitive landscape that might have contributed to this change? Secondly, regarding your remarks about retail in Q2, can you tell us if the performance was stable, especially considering the disruptions in the last two months of June compared to last year and the previous year? It appears that June should have performed significantly better year-over-year than the other two months. Are you concerned that this wasn't reflected in June, which could have been one of the easiest comparisons for Harley? Thank you.

Yes, Robin, thank you. Welcome. Our Touring market share was very strong in the second quarter with a significant increase, as I mentioned in our press statement and in my speech. We experienced considerable growth in the overall Touring segment in the U.S. during Q2. On a global scale, it's important to note that the new Touring motorcycles only began entering international markets in May, so they had less time to establish a presence. The Touring segment internationally represents only 25% of the total, whereas in the U.S., it's much higher. Regarding our comparisons in Q2, as Jonathan mentioned, they were much tougher than in the latter half of the year because we had positive retail in the second quarter of the previous year, making it a strong quarter to compare against. The production disruptions we experienced mainly occurred in July of last year, meaning the closure of the manufacturing facility didn't significantly affect our shipments in the second quarter or in June of last year. Therefore, we wouldn't have expected this to materially impact our comparisons to the previous year. Overall, while we always hope for more, given the state of the industry, we are very pleased and have gained significant market share in the Touring segment, which is a positive outcome.

Yes, Robin, the only piece that I would add is that we are pretty pleased with what we're seeing in terms of total Touring and total CVO volume. So from our perspective, we feel pretty confident in where we are for all of the elements that Jochen talked about, all the reasons that he talked about, and the share gains that we're seeing.

I think it's interesting to note that we've discussed the average age, which is 45 according to the slide we included in our presentation. When we examine the HDFS data alongside the average income, we've observed a steady increase in average income per Harley user, which is a positive indicator. If we focus on new customers, their average income is actually 15% higher than it was five years ago, exceeding $100,000. Therefore, we're witnessing an upward trend in the overall average income of our customers, which we view as a positive development.

Great. Thank you.

Our next question comes from Joe Altobello from Raymond James. Please go ahead. Your line is open.

Thanks. Hey, guys. Good morning. So earlier, you mentioned that you expect dealer inventory to come down, I think you said 30% in the second half and about flat with last year. When you talk to your dealers, would they like that number to come down even further? Because I'm sure that the dollar value of their inventory is higher than it was pre-COVID, particularly on a per dealer basis, and interest rates are obviously much higher. So I'm curious what you're hearing from dealers if they want that number to come down even further in '25.

Most of our dealers are just beginning to see the shipments arriving at their dealerships in the third quarter. Overall, we've encountered minimal pushback. If there was any, we would shift that product elsewhere. The 30% figure is a global average, and we expect U.S. inventory to decrease by around 35% by the end of the year. This means U.S. dealers will experience an additional reduction. From our viewpoint, this is quite significant, and dealers will start to notice it as shipments decrease noticeably. We aimed to be well-prepared for our peak season in the next few months, and we are ready. There have been no significant production issues, so dealers are well stocked. Floor plan remains a concern due to higher interest rates and increased dollar values, which HDFS is able to finance. Overall, we believe the reductions we’ve made will be quite noticeable to our dealers, with a 35% decline compared to the current situation.

Got it. Very helpful. Maybe just to follow up on that, the outlook for retail growth in the second half, maybe give us an idea of what you're seeing in July?

I don’t want to comment on current trading as we are just three weeks in, but everything was fairly consistent in the second quarter. We're also comparing against the production shutdown we had in July of last year. What we're observing now has been considered in our full-year guidance. Moving forward, I would prefer not to discuss current trading because it tends to be quite volatile. However, I can assure you that current trading has been included in our full-year guidance.

Our next question comes from Brandon Rolle from DA Davidson. Please go ahead. Your line is open.

Good morning. Thank you for taking my questions. First, just on your dealer network, we picked up on some more dealership closures throughout the quarter. Can you talk about where you feel like your dealer network is right now, and how these closures will impact overall future profitability for HDMC? Thank you.

Sure. Thank you, Brandon. So I'll start. And I think from a dealer closure perspective, we certainly look to make sure that we are working to refine the dealer network, get locations set up in a right way, and do that in a manner that really allows the surrounding dealers, all of our entrepreneurial partners to be profitable and really generate a business return that makes sense for them. So as we look, I think a couple of things. One, from a Harley-Davidson Motor Company, Harley shareholder standpoint, we certainly are thoughtful in making sure that we have the right locations in place, that we're reaching the consumers that we need to, and that we have a path toward ensuring that we're fulfilling the needs of our customers and our riders. Then we also look from a dealer lens and really think through from a dealer partner perspective. Are we building a network that's profitable, sustainable, and there from a long-term standpoint? And we feel pretty good about the way that we're partnering with the dealer network and the way that we're allowing them to generate returns over time. Overall, I think yes, you'll continue to see us be opportunistic in finding the right path from an overall dealer network design standpoint. And we will make sure that we do that in a way that doesn't negatively harm Harley-Davidson shareholders. So we are ensuring that we are really developing the optimal distribution footprint. And then we do that with our dealer partners in mind too, to ensure that they are generating a return that makes sense for their investment.

Great. And just one more question. We receive a lot of incoming questions about maybe your ability to keep innovating. Obviously, this was a big refresh this year within the Touring lineup, but what gives you confidence or what can you leverage from what you've learned this year to continue innovating and providing new lineups that resonate with your core consumer? Thank you.

Yes, I mean, we have a product portfolio plan that spans over many years, which we've initiated in 2021 with a Hardwire strategy, and that is going to flow into the market in the coming years. So we feel very good about it. Most importantly, this touring launch is significant. The previous platform had not been updated for well over 10 years, and this product is distinctively different from anything out there. So it makes everything out there that is not our new Touring bikes look dated, and we believe that that will help us in years to come. But that said, there's more innovation coming over the next few years, so we feel quite good about the pipeline that we have in place.

Great. Thank you.

Our next question comes from Noah Zatzkin from KeyBanc Capital Markets. Please go ahead. Your line is open.

Hi. Thanks for taking my questions. Maybe just first on HDFS, how are you guys feeling about the health of the book? And then our annualized retail credit loss is kind of where you expected them to be right now. Then second, if you could just kind of touch on maybe any market dynamics that you're seeing that differ overseas. I know APAC was a bit softer. I think some of the other regions were pretty similar in North America. So any color there would be helpful. Thanks.

Yes, please go ahead, Jochen.

No, that's fine. Sorry, I'm starting from the back. Regarding market dynamics, I mentioned Asia, which has been significantly impacted by declines in retail, particularly due to China. Asia was experiencing growth for six consecutive quarters, but now we are in the fourth quarter of decline. While I am not pleased with this trend, I can say with certainty that we attribute it to the overall challenging market environment, especially in China and some Southeast Asian markets. If you examine the retail data, Asia has been the one region that has faced a much tougher situation, although it had shown considerable growth prior to this decline.

From the perspective of HDFS, we have observed our overall allowance position. Comparing it to the time of CECL, we believe we are in a solid position regarding reserves. When we analyze delinquency and losses, overall consumer delinquency is slightly above our preferred level. However, the HDFS team is effectively managing delinquency and supporting customers. In terms of losses, they align with the expected seasonal patterns typical for this credit environment. When we benchmark against auto lenders, we feel positive about HDFS's performance and the health of the portfolio. We continuously monitor losses and reserves in relation to revenue, and we remain satisfied with HDFS's overall performance, which is reflected in our reaffirmed guidance for the year. Overall, our expectations for the year are unfolding as we anticipated.

To address your question regarding market performance, there is a lack of consistency across the different regions we operate in. In the EMEA region, for instance, markets like Spain, Italy, and Portugal are performing exceptionally well, while Germany and France are struggling. Similarly, in the U.S., there are marked differences, with some areas seeing significant growth while others are experiencing declines. Overall, the performance is not uniform across all markets, which is quite interesting. We believe much of this variation is tied to the economic development within those specific markets and states.

Very helpful. Thank you.

Our next question comes from Tristan Thomas-Martin from BMO Capital Markets. Please go ahead. Your line is open.

Good morning. I was wondering, can you provide a breakdown of how much of your channel inventory is model year '24s versus '23s? And then I was also kind of wondering what promotional leverage you have kind of for the rest of the year if you do need to provide a little juice to hit your inventory decline targets? Thanks.

So, as you have probably seen, we are not promoting our '23 model year with the exception of our 399 promotion, which is basically something we've had in market for quite some time. And so there are no more promotions, and the reason for that is because there are minimal levels of inventories of '23s in the market that some dealers actually want to have, bringing customers into their dealership. But we stopped promoting the model '23 for that reason. We are pretty much the only company out there that does not promote '24s. I'm sure you've noticed that as well. We're not going to comment on what's going to happen in the second half. We're obviously watching things carefully, but at this point, there's no promotions active for model year '24.

Okay. And then if I could just kind of sneak one in there. The average age chart you posted, is that in line with where you want it to be? And kind of, if we look at a couple of years, how do you think that's going to trend? Thanks.

I believe the average age is quite healthy. As I've mentioned before, people tend to age into the brand. When I was 16 or 18, I dreamed of owning a Harley-Davidson, but it was beyond my financial reach at the time. Typically, the entry point may be a bit earlier in the U.S. market, but overall, the consistency we're seeing is positive. According to the data we have, our audience is even younger than some established brands. The rise in average income is a good sign as well. Notably, 30% of our loan origination volume comes from customers aged 35 and younger, which is significant. Additionally, 75% of our customers are under 54. While attracting a younger demographic is important, we must remember that we are a premium motorcycle manufacturer with the highest price points in the market. This reality influences age demographics since people tend to purchase larger motorcycles, which are not typically ridden by younger individuals unless they can afford it. The consistency we've seen is reassuring, and if I were to look at data extending beyond 10 years, I believe that trend would remain stable. It's valuable information for the market that we wanted to share with you.

Got it. Thank you.

Our last question today will come from Fred Wightman from Wolfe Research. Please go ahead. Your line is open.

Hey, guys. Good morning. I'm wondering if the updated operating margin guidance, if that is really just reflecting the deleverage from a production and a fixed cost absorption perspective, or if you're actually earmarking or planning for some incremental dealer support costs. I know you've given some specific numbers earlier in the year for dealer support for non-currents, but I'm wondering if the plan is that the updated margins could include some incremental promo from here too.

Yes. Okay. So Fred, I'll take that one. And I think, it's a great question. Thank you for the question. As you go through and you look at the impact from an OI margin perspective, it is primarily due to the impacts of leverage. So as we think about where we are from an overall production perspective, as we talked about, we did make sure that we adjusted guidance for where we're going. We are also being extremely thoughtful in overall inventory levels that we are running. And so we're working hard to make sure that we're actually moving through company inventory in a way that makes sense, thinking about where dealer inventory sits, ensuring that our dealers are well-positioned to take advantage of retail, but we want to make sure that we are very thoughtful in the levels of inventory they have in light of Fed base rates. And so as you kind of take that all the way back to sort of the direct answer to your question, it really is production volume, the impact from leverage that really drives our OI performance. Again, as you heard us touch on too, we actually feel very, very confident in our long-term OI margin and where we are going. And you saw our commitment to that from a long-term standpoint too.

Perfect. Thank you.

You’re welcome. Thank you.

There are no further questions at this time. This concludes today’s conference call. Thank you all for joining. You may now disconnect.