Harley-Davidson, Inc. (NYSE:HOG) Q3 2023 Earnings Call Transcript

Harley-Davidson, Inc. (NYSE:HOG) Q3 2023 Earnings Call Transcript October 26, 2023

Harley-Davidson, Inc. misses on earnings expectations. Reported EPS is $1.38 EPS, expectations were $1.39.

Operator: Thank you for standing by and welcome to the Harley-Davidson 2023 Third 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.

Shawn Collins: 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 business 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 our latest filings with the SEC. With that, joining me this morning for the first part of the call are Harley-Davidson Chief Executive Officer, Jochen Zeitz; also, Chief Financial Officer, Jonathan Root; and LiveWire CEO, Karim Donnez. In addition, for the Q&A portion of today’s call, Harley-Davidson Chief Commercial Officer, Edel O’Sullivan will be joining us, as she usually does. With that, let me turn it over to our CEO, Jochen Zeitz. Jochen?

A row of motorcycles parked outside a motorcycle dealership, advocating the brands’ presence in the market.

Jochen Zeitz: Thank you, Shawn, and good morning, everyone. Thank you for joining us today for Harley-Davidson and LiveWire’s Q3 results. I will start with an overview of the HDMC business for the quarter. Karim will then provide commentary on LiveWire, and Jonathan will run out the financials for HDI including HDFS before we go into questions. As we closed out the third quarter of ’23, it is clear that, the macroeconomic backdrop has been a challenge for our customers globally and in turn for our business with both inflationary pressures creating affordability challenges and high interest rates contributing to slower upgrade pipeline. We have continued to work through the effects of the unplanned production suspension in June and July, which impacted Q3 by delaying the availability of some of our high-demand products, as well as altering our inventory mix, especially in North America.

Given this complex environment, we continue to focus on the execution of our five-year strategic plan. Results for the quarter reflect a revenue decline of 9% at HDMC, partially offset by revenue growth of 15% at HDFS, contributing to an overall revenue decline of 6% for the quarter. This performance was driven by a 20% decline in wholesales due to the production suspension announced in late Q2, food and dealer inventory management, and market conditions in line with our latest guidance. This was partially offset by both higher pricing and mix. Q3 year-to-date, revenue for HDMC is up 2.1% despite the challenging conditions of the year. I want to provide a few more specifics behind these figures, taking into consideration both our hardwire strategy as well as the realities of our sector right now.

Firstly, our hardwire strategy prioritizes our stronghold categories of touring, softail, Trike, and CVO. The premium segment has been disproportionately impacted this year as affordability and discretionary spend have become more of a concern and as macroeconomic conditions have slowed down the upgrade cycle in these categories, particularly in a long-running platform like Rushmore and touring. It’s important to note, however, that we continue to enjoy market-leading economics and more than 70% share in these highly desirable, profitable categories in North America. We believe that customer desire for a Harley Davidson touring bike, the pinnacle of motorcycling remains undiminished despite the well-entrenched narratives to the contrary, and that both differentiation and a compelling value proposition can drive growth even in the challenging market.

Secondly, our retail volume in North America in particular has been adversely affected by the sunset of our legacy sports store, which was a share builder in the cruiser category. We believe our RevMax platform introduced in ‘21 to be both unique and tech forward, and that the platform when positioned competitively has the potential for customer adoption to grow over time. Thirdly, we remain focused on managing inventory, our dealer channel to protect desirability and long-term profitability. Given overall market conditions, we’ve acted throughout the year to manage overall inventory levels within these constraints of manufacturing realities. It is important to note that the production suspension late in Q2 created challenges to our timing, mix, and distribution of inventory in the channel, which we also work to address throughout the quarter.

It is also worth noting that as we finish ‘23 production at the end of last week, we believe current inventory in any remaining shipments for this year’s product will support retail volume throughout Q4 and early in ‘24. We also recognize that the market conditions where demand is more uneven requires us to operate at inventory levels that are higher than what we saw in ‘21 and ‘22. Lastly, we’ve increased our marketing promotion and spend to both support our loyal customers and dealers in a challenging environment and manage inventory mixed against our strategic objectives, particularly with product arriving later in the year. While this spend is higher than in both ‘21 and ‘22, it’s important to know that this investment is targeted, limited, and balanced across traffic driving and support for closing deals.

We’ve seen this yield many learnings and better alignment with our dealer network. Despite the many, many challenges of the year, there are significant highlights to share. Firstly, our CVOs have been very well received in the market with sales in the category up 25% versus prior year, and demonstrating strong sell-through. Our dealers and customers are excited by the evolution this product demonstrated in the most exclusive category in our lineup. Secondly, both our combined trike and softails are also demonstrating retail growth up 12% for the year at the end of Q3. We’re actively expanding capacity for our trike offering while driving more production to our hottest models with breakout in the software category being a good example of this.

Both these examples demonstrate that even through difficult conditions a compelling offer coupled with a strong value proposition can drive growth. Through the quarter, all global regions continue to show strong profitability driven by a strong focus on mix management and growth in our most profitable categories. This turnaround has contributed significantly to the bottom line for our business, and we believe this provides a solid platform for future profitable growth. As some of you have already noted, on October 3rd and 4th, we had an in-person dealer forum in Milwaukee for the leadership of our North American dealer network, the first of its kind, attended by roughly 80% of our dealer body in North America this event had three objectives.

Firstly, to share exciting product developments with our dealer network. Secondly, to build further alignment with our plans and investments designed to maximize impact in ’24, and thirdly, to get us all energized and prepared for what’s to come in ‘24. Over the course of one and a half days our agenda spanned product introductions, growth and profitability planning, go to market alignment and updates on key initiatives like membership and loyalty. Feedback on the event has been overwhelmingly positive with over 90% of attendees satisfied with the information shared and the meeting overall, and with dealers highlighting the value of this session to ensure we are fully aligned as we enter the back half of our hardwire strategy. As we’ve said before, we believe our dealer network is the strongest, most exclusive and most powerful dealer board in all of Powersports and remains a critical competitive advantage to drive growth, manage inventory and support our customer experience.

Before I hand it over to Karim, Harley-Davidson remains committed to its hardwired strategy with a focus on both profitability and desirability, and we will do everything possible to achieve our goals. That said, we are certainly realistic that current market conditions are challenging, but we’ll continue to focus on what we can control, including scrutinization of our OpEx and focusing on cost productivity gains.

Karim Donnez: Thank you, Jochen. Good morning, everyone. Q3 saw many important developments for LiveWire as we continue to advance our product portfolio and build out our commercial footprint. Most importantly, we started production of the Del Mar at the Harley Davidson factory in North Pennsylvania. This is an important milestone for LiveWire. After a multi-year investment in the S2 platform and the in-house development of the LiveWire battery pack, motor, power electronics, and software. We believe these investments have given us an industry-leading technology and the capability to rapidly adapt and advance the S2 platform while reducing LiveWire’s dependency on third-party suppliers. Our early customers have now started to receive their Del Mar and the bikes are on the road in the US.

Those riders that have experienced Del Mar are impressed by how the bike delivers on the LiveWire promise with outstanding specs and the more accessible price parts. With production now ramping up, we expect to see increasing volumes in Q4 as we get more bikes to more customers. We recently announced European pricing for the Del Mar confirmed delivery dates in Q1 2024 and open reservations. Two weeks ago, we hosted media and influencers from across the European market at a Del Mar press event in Barcelona, building early momentum for the spring riding season. Our development teams are working hard to leverage the existing basic and LiveWire platforms to expand the Group’s portfolio and with more options to more riders. As we look to the end of the fiscal year, our cash investments are inline with our plan.

We also expect to meet our most recent guidance based on demand and current daily production outputs. Thank you. And now I will hand it over to Jonathan.

Jonathan Root: Thank you, Karim, and good morning, everyone. The third quarter of 2023 is the fourth time under our new reporting structure with the three-business segment of HDMC, HDFS, and LiveWire. In Q3, global wholesale shipments decreased by 20% as Jochen referenced earlier, due to the production suspension announced in late Q2, prudent dealer inventory management, and market conditions inline with our latest guidance. In addition, we comped a very strong growth quarter that was up 19% in 2022. From a Q3 revenue standpoint, improved global pricing and our continued focus on core motorcycle mix of touring and cruiser motorcycles, were able to partially offset the unit declines. This enabled us to turn in a consistent margin performance on a year-to-date basis.

Turning to our financial results in the third quarter, total consolidated HDI revenue of $1.5 billion, was down 6% compared to last year. The breakdown was: at HDMC, revenue declined by 9%. At HDFS, revenue grew by 15%. And at LiveWire, revenue declined by 45%. Total consolidated HDI operating income was $209 million, which was $129 million lower than the prior year. The breakdown was: At HDMC, operating income of $175 million was 37% lower than the prior year. At HDFS, operating income of $59 million declined by 27% on a year-over-year basis. And at LiveWire, an operating loss of $25 million was inline with our expectations. Third quarter earnings per share of $1.38 is down 22% as a result of the factors noted. As we look at our year-to-date results, total consolidated HDI revenue of $4.8 billion was up 4% compared to the same period last year.

The breakdown of this was: At HDMC, revenue increased by 2%. At HDFS, revenue grew by 17%. And at LiveWire, revenue declined by 39%. Total consolidated HDI operating income was $800 million, which is $105 million lower than the prior year. The breakdown of this was: At HDMC, operating income of $705 million compares to $709 million in the prior year’s period, reflecting a strong operating margin of 17.4% in 2023 year-to-date. At HDFS, operating income of $177 million declined by 30%. And at LiveWire, an operating loss of $82 million was inline with our expectations. Year-to-date earnings per share of $4.65, compares to $4.68 last year. Global retail sales of new motorcycles were down 16% versus the prior year. In North America, Q3 retail sales declined by 15%, driven by the impact of a high-interest rate environment on consumer discretionary purchase decisions.

In addition, the discontinuation of legacy Sportster bikes at the end of 2022 continues to have an adverse impact on non-core units sales. In EMEA, Q3 retail sales declined by 13% driven by the plan unit mix shift towards profitable core product segments. Core bikes now comprise 80% of sales up from 70% in 2022. In Q3, touring bikes were up 10% versus prior year. In Asia Pacific, Q3 retail sales declined by 24% versus prior year, which is down sequentially relative to Q2 ‘23 when retail sales were up 24%. The weakness in Asia Pacific was primarily driven by weaker-than-expected demand in China, where the Chinese economy was softer than we had expected. In Latin America, Q3 retail sales declined by 11%, driven by weakness in Brazil. That was partially offset by growth in Mexico.

Beneath the surface of our Q3 retail results, we note that the production suspension that we experienced for several weeks in June and July of 2023 had an adverse impact on retail sales, particularly in the key North American market. It delayed deliveries in high-demand units to the end of Q3 rather than earlier in the season. It also created challenges in the distribution and mix of the inventory in the channel. This held back our preferred motorcycle mix versus what we had expected. On a year-over-year basis, average inventory in Q3 was up by more than 50% to broaden product availability compared to the exceptionally tight levels of 2021 and 2022. Dealer inventory continues to be down versus 2019 levels. We believe current dealer inventory plus remaining 2023 calendar year shipments will support the rest of Q4 and early Q1 of 2024.

From a retail pricing standpoint, new Harley-Davidson motorcycle transaction prices in the U.S. year-to-date have been broadly in line with our desirability threshold of plus or minus 2 percentage points of MSRP. At the HDMC segment revenue declined by 9% due to lower wholesale units shipped in Q3. Wholesale units were down 20% in Q3. Looking at the HDMC revenue bridge and focusing on the key drivers for the quarter, 18 points of decline came from decreased volume at HDMC which was primarily driven by the previously mentioned decrease in wholesale motorcycle unit shipments. Three points of growth came from pricing through both global MSRP increases and pricing across the parts and accessories and apparel and licensing businesses. Mix contributed six points of growth as we continue to prioritize our most profitable models in markets.

And finally, foreign exchange was flat in Q3. At HDMC, operating income of $175 million in Q3 was 6.1 points lower than prior year, driven by lower wholesale shipments and higher operating expenses. HDMC gross margin in Q3 was 31.7%, which compares to 34.4% in the prior year. The decline of 2.7 points or 270 basis points was driven by the negative impacts of lower volume, unfavorable manufacturing impacts, and foreign currency more than offsetting the positive impacts from pricing and shipment mix. We experienced more modest cost inflation, which was approximately 1% in Q3. On a year-over-year basis, the deceleration continued to be largely driven by logistics, including lower expedited shipping expenses and favorable ocean freight rates. Raw materials and metal markets have also continued to moderate.

HDMC operating margin came in at 13.5% in Q3 from 19.6% in the prior year. The decrease was due to higher operating expense including higher people costs and marketing spend. For the year-to-date period at HDMC, operating income of $705 million compares to $709 million operating income in the prior period. HDMC operating margin of 17.4% in the year-to-date period is approximately 50 basis points lower than the prior period. The small decrease is due to the negative effects of volume, foreign currency, supply chain costs, and higher operating expense offset by the positive effects of higher pricing and improved mix. At Harley-Davidson Financial Services revenue increased by 15%, driven by higher finance receivables and higher interest income.

HDFS operating income in Q3 was $59 million down 27% compared to last year. The Q3 decline was driven by higher borrowing costs as well as higher provision for credit losses due to realized credit losses and an increase in the credit reserve. In Q3 HDFS’ annualized retail credit loss ratio came in at 2.7%, which compares to 2.6% in Q2 of this year. During the quarter, losses followed their typical seasonality curve with performance in line with expectations. These levels compare to an annualized loss of 1.9% in full-year 2022. The increase in credit losses was driven by several factors relating to the current macroeconomic environment. In addition, the allowance for credit losses for the third quarter increased to 5.4%, up from 5.3% in Q2 and from 5.1% during fiscal 2022.

Total retail loan originations in Q3 were down 15% while commercial lending receivables were up 39%, so $1.05 billion behind stronger product availability compared to prior year. Total quarter-end net financing receivables, including both retail loans and commercial lending receivables was $7.7 billion, which was up 4% versus prior year. Total interest expense in Q3 was up $23 million or up 38% versus 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. Through the end of Q3 we raised approximately $2.5 billion in the capital markets. Cash and committed bank and conduit facilities resulted in an HDFS liquidity position of $2.5 billion. We believe this has put HDFS in a very strong position from both a funding and liquidity perspective.

For the LiveWire segment third quarter revenue decreased from $15 million to $8 million versus prior year due to the lower unit sales of LiveWire ONE electric motors cycles and static electric balance bikes. During the third quarter of 2023, LiveWire began shipping Del Mar the first motorcycle on the company’s S2 platform. LiveWire operating loss of $25 million was in line with expectations and driven by planned development costs to advance EV systems activities around Del Mar and cost of standing up a new organization. Third quarter also saw a sequential decrease in LiveWire’s operating loss of $7 million as compared to the second quarter of 2023. Wrapping up with Harley-Davidson, Inc. Financial results. Year to date, we delivered $707 million of operating cash flow, which was up $132 million from the prior year.

The increase in operating cash flow was due to positive working capital activity driven by a larger decrease in inventory in the first nine months of 2023 versus the same period in 2022. Total cash and cash equivalents ended at $1.9 billion, which was $148 million higher than at the end of Q3 prior year. This consolidated cash number includes $200 million from LiveWire. Additionally, during the first nine months of 2023, as part of our capital allocation strategy, we bought back 6.1 million shares of our stock at a value of $226 million. As we look to the rest of 2023, we are reaffirming our most recent full-year guidance, which expects HDMC revenue growth of flat to plus 3%. HDMC operating income margin of 13.9% to14.3%. We continue to believe the anticipated positive impacts from pricing and our cost productivity efforts within supply chain will offset expected cost inflation and currency headwinds.

At HDFS, we continue to expect operating income to decline by 20% to 25%. In Q3, we experienced higher realized credit losses than in Q2 as seasonality played out, as we had expected. We continue to stay focused on several actions underway to effectively manage the business in today’s credit environment, including increased investments behind collections, and stronger repossession efforts. And we continue to build other revenue sources, such as licensing and trademark revenue and insurance revenue, which continues to exceed that from the same period prior year. LiveWire continues to expect unit sales between 601,000 units and an operating loss range of $115 million to 125 million. This forecast incorporates the updated launch timing of the new Del Mar electric motorcycle.

And lastly, for total HDI, we continue to expect capital investments of $225 million to $250 million, as we continue to invest behind product development and capability enhancements. During the first nine months of the year, we are seeing cost inflation generally inline with our expectations and continue to expect in aggregate about one to two points of inflation for the full year of 2023, compared to 4% in 2022. Labor and warehousing costs continue to be the primary drivers of inflation, with deflation and moderation expected within logistics, freight, and raw materials. We now expect $70 million of cost productivity in 2023, as a result of the updated production environment. This is down from an estimate of $100 million at the end of Q2. For HDFS, we expect the operating income declines to moderate in the last quarter of the year, as we begin to comp the interest rate increases and normalizing losses that began in late 2022.

As we look at capital allocations for the remainder of 2023, our priorities remain to fund the growth of the LiveWire initiatives, which includes the capital expenditures mentioned previously, paying dividends, and executing discretionary share repurchases. In summary, we are pleased with the resiliency of our financial results, especially our margin performance despite a complex retail environment. And with that, I will turn it back to the operator to take your questions. Thank you.

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Q&A Session

Operator: [Operator Instructions]. Your first question comes from Craig Kennison from Baird. Please go ahead.

Craig Kennison: Hi, good morning. Thanks for taking my question. Between retail sales and your HDFS portfolio, you have very good insight into the areas of stress the consumer is facing today. I’m just wondering how you would describe the U.S. consumer today at various income levels and credit tiers, and then what the key pages of your recession playbook might be if we indeed enter a recession in ‘24?

Edel O’Sullivan: Good morning. Thank you for your question. I think we see some of the elements that you are describing around consumer health show up in a couple of different metrics. We certainly in the first place see a lot of customers sitting on the sidelines, essentially just putting this level of a discretionary purchase to the side in 2023, which obviously for us, the business that is very much dependent upon an upgrade cycle of certain regularity is quite a meaningful impact. That I think is the first factor. We have understanding of that through market research of just customers sort of putting a purchase of this nature out of their mind in a year like 2023. Secondly, you see a lot of customers, maybe even those with high credit worthiness, looking at the level of the rates and saying that having a certain amount of rate shock and saying, we are not going to pay those level of rates based also on many years and many decades of lower rates.

So that is the second place where it shows up. And then the third level is potentially for our more credit challenged customers or customers at a different income level, potentially a little bit lower, just looking at the monthly payment that results, particularly when you consider a trade-in that might be worth a little bit less, given what was paid forward in ‘21 and ‘22. Not seeing the ability to really add to their monthly payment to manage an upgrade or a new motorcycle purchase. It’s just a limit of affordability within their month-to-month budget. So, it is prevalent in a couple of different places, just people sitting this year out, people not willing to pay those rates. And then just difficulty potentially in reaching the monthly payment.

I’ll let Jonathan in a minute comment a little bit more on the health of the customer, but to your second point around our recession playbook. Our recession playbook is very much rooted in our strategy, which is we intend to continue to defend and protect the most important and profitable categories for our business. Our stronghold categories of touring trike CVO and Softail, as Jochen mentioned in his commentary, and even in a difficult year like this one we have seen that where we have a stronger value proposition product innovation, we see relatively stronger performance so that intend to continue emphasizing innovation and development in those stronghold categories. We will continue to work with HDFS and with our dealers who are the best in the business with the right tools to put in the market to be able to make each and every customer that is interested in a motorcycle, be able to find the right combination of factors and the right bike for them and continue to use other important aspects of our business, like used motorcycles like P&A and A&L to make sure that consumers are still flowing to the dealerships and still have the opportunity to engage with our brand even in a recessionary environment.

Jochen Zeitz : Thank you. And before Jonathan takes on, just in terms of recession playbook, obviously, we are going to take a hard look at OPEX and cost productivity. I think those are two areas where we have room for improvement given the developments in the market. And obviously, we know that in the last couple of years, cost productivity due to the inflationary pressures we’ve seen has declined. And that’s something we are taking a very hard look in addition to OPEX in order to be prepared for no matter what comes our way.

Jonathan Root : Okay, thanks Jochen. And I’ll just add a couple of points. I think Edel covered this really nicely, but I think with where we are in consumer health, we are seeing a more stressed consumer. So, as we reach out to the consumer from an HDFS perspective, they are working a little harder to balance payments across their portfolio than where they were. Certainly, when you look at the segments, there’s more tension in subprime than there is in prime, across the HDFS business for a number of years, we’ve been reducing our exposure to the subprime side, so the portfolio has less subprime consumers in it than it, than it has, versus the last few years. To provide a little bit of color in terms of where we are in delinquency, we’re certainly seeing delinquency up a little bit versus the same period prior year.

This is also demonstrated and disclosed on our page 13, where we walk through what we’re seeing from a credit loss standpoint as that kind of moves up. And then with that, we’ve taken some changes in the provision to make sure that we are covered from a future perspective. And then just touching a little bit further on recession playbook, I think Jochen hit on a couple of really good thoughts, right? Making sure that we’re looking at the OpEx side of our business to ensure that we’re bringing out costs where we can, we’re not stopping there. We are continuing to go a little further and make sure that we are thinking about the cost of goods sold side and really diving in there, to ensure that we can hit targets. And then the last piece I think is from a recession playbook perspective, when we look at HDFS and think about some of the nearer term actions that we can take, obviously the portfolio that you have is the one that you work with.

So, from the standpoint of what we do day in and day out, it’s really about making sure that we have the appropriate collection staff in place, that we’re going after customers in a way that’s fair and helps bring them current. And then we also look at kind of different technology tools that we can use to help our associates and help our customers. So, reaching out to customers in different fashions. So rather than just in a telephone approach, we make sure that we can use texts that we’re using email, that we’re really allowing customers to interact with us in ways that they want to. And then last point that I’ll touch on is that we do actually run our calls through an AI process to really look and make sure that we’re comfortable with the way that our collectors are interacting with consumers.

So overall, I think a very good question. Something that we certainly feel like we’re managing, in line with the environment that we’re in. But again, good question. Thank you so much.

Operator: Your next question comes from the line of Robby Ohmes from Bank of America. Please go ahead.

Robby Ohmes: Hey, good morning. Thanks for taking my question. I was hoping, Jochen and everyone could, maybe give some thoughts on the dealer inventory levels and are they still out of balance? And are you, is there a lot of work to do to get them more in balance in terms of, you know, more trikes and less sportsters and things like that? And, what would be the timing of getting the dealers in the position you would want them to be in from the inventory mix standpoint? And related to that, how should we think about, supporting dealer promotions going forward and also maybe supporting HDFS promotions as well is, should we think about that for the fourth quarter, as an impact on gross margin and any thoughts on how that might spill into the first half of next year?

Edel O’Sullivan: Thank you, Robby, for your question. Let me touch upon the point around inventory first. So certainly, we have been working throughout the course of Q3 to ensure that we are getting to the right level and the right mix of inventory as you appropriately note in the channel. It is certainly no secret that as we have gone through some of the supply disruption that Jochen referenced, which has shown up in, in both our supply chain as well as in overall the timing of the units that are available in the dealer, that that has led to some impact upon our ability to retail within the quarter. That is either, as I said, a combination of timing of when the units arrive or the mix of units that we have in the channel.