Jonathan Root: Yes. So Fred, this is Jonathan. Good question. So as we as we take a look at financials relative to support to move through those units at retail, obviously, the majority of the dollars were reserved for in Q4. There were some select segments where we made the offer a little bit more attractive from a rate standpoint. And with that, we took a dollar amount that hit our Q1 financials of about $18 million in Q1, and that’s reflected as you take a look at our price walks that we put out there. But overall, we feel like the majority of the dollars obviously have been reserved. And then from what we talked about in the prior question, as that inventory sells through and moves down, obviously, from our perspective, the exposure decreases as the units decrease.
Jochen Zeitz: Impact you should expect in the first quarter and the units are now going down. So, that is reduced and the majority has been budgeted for in anticipation.
Fred Wightman: Perfect. Thanks a lot.
Operator: Our next question comes from Alex Perry from Bank of America. Please go ahead. Your line is open.
Alex Perry: Yes. Hi. I think maybe a follow-up on that last question, but could you just talk about how HDMC gross margins played out versus your expectations when you sort of put all the pieces together. And I guess as we move through the year, would you expect to start to see year-over-year expansion in the HDMC gross margins, or how much should we be expecting from pressure from pricing and incentives? Thank you.
Jochen Zeitz: Yes. I will let Jonathan take or explain the details. But overall, first quarter played out the way we have expected it and we held our margin guidance firm. So, we feel that the next quarters will go also as expected with improvements in gross profit margin along the line. So, overall, we – there is nothing that surprised us in the first quarter the way that gross margin played out, and we think we can achieve our targets that we have set in terms of guidance. Jonathan?
Jonathan Root: Okay. Thanks Jochen. Alex, just to add a little bit more color on your question. I think in Q1, gross margin came in at 31.2%, which compares to 35.8% in the prior year. So, obviously, as you look at that, a decrease of about 450 basis points, that was driven by lower operating leverage and the revenue factors that we walk through on Page 7 in the deck. So, we have some more materials on that. We obviously – as we look at the gross margin as we move forward, we do envision modest cost inflation of something that’s around 2%. So, about where we were last year, maybe up a tiny bit from an inflation standpoint, certainly down pretty meaningfully from 2022. Hang with me here as I explain some of this, but the majority of the units that we ship in the first quarters, so think about 2024 and 2023, those were produced in the preceding fourth quarters in advance of the new model year launch.
As we sort of try to put this into perspective, production volumes in the fourth quarter of ‘23 were down about 24% compared to the fourth quarter of 2022 which results in a higher fixed cost per unit on motorcycles that end up getting shipped in the respective quarters. That unfavorable impact of the lower operating leverage is offset through productivity savings in the latest quarter were primarily related to logistics. There was also a little bit of mix noise in this quarter between motorcycle, P&A and A&L. And so the kind of complexion or makeup between motorcycle P&A and A&L causes some uniqueness as we analyze the dollars, so favorable dollars and unfavorable percent that really expresses the additional dollars from the motorcycle mix with a decreasing mix from A&L and P&A which have typically favorable margins.
So, good question, I think a unique situation in terms of where we are. And then as Jochen touched on, when we sort of flow that gross margin guidance, all the way through to sort of OI margin and what we envision on that front, we came in at 16.2%, which is above our full year expectations, and as Jochen touched on, in line with expectations for the quarter. So, hopefully, a little more color probably than you asked for, but hopefully that helps explain where we are.
Alex Perry: Perfect. That’s really helpful. Best of luck going forward.
Jonathan Root: Thank you.
Operator: Our next question comes from James Hardiman from Citi. Please go ahead. Your line is open.
James Hardiman: Hey. Good morning. I wanted to dig just a little bit more on the retail front and sort of how the first quarter plays into the full year. Obviously, worldwide retail flat for the first quarter, your full year guidance is based on zero to 9%. I think a lot of us or at least the way I thought about it was that you had bunch of new products in the first quarter, easy comps there and then a lot of promotional dollars. So, I sort of assume that the first quarter will be the strongest of the year. Maybe walk us through how you guys think about the quarterly cadence of what retail is ultimately going to look like? What it sort of needs to look like to get to your guide? And do you need any macro help to sort of get to where you think you need to be? Thanks.
Jochen Zeitz: Thanks James. It is always hard to predict retail, but I think one factor in the first quarter do we consider is the ‘24 is not coming into the international market until very late in the quarter or not at all in some markets, as I mentioned earlier. And that should help to pull some of at least the EMEA region out of the negative that we have seen in the first quarter to something that’s more balanced going forward, so that’s helpful. I think if you look at the Asia market with the weakness in China, although we expect some improvement, I would say that’s unlikely to turn significantly positive. We will have to see how that pans out. But I am more skeptical about the Asian market, but we have budgeted accordingly.
Latin America has been positive. And the U.S., if you look at the second quarter, the comp versus prior year is a little tougher than the back half of the year. So, you should possibly expect that the North American market, we don’t know if it’s going to be positive or how positive is we feel really confident about the market. But if you just look at comps, the back half is much simpler, easier comps than the second quarter. I hope that helps a little bit to contextualize. But in the first quarter, we certainly didn’t have any help with the exception of Latin America that was positive albeit in small numbers from the international market. We hope that, that changes at least in EMEA, and we are confident for the rest of the year, which is – but we also have to recognize that we are really just entering the writing season as we speak now, and a lot depends on the second quarter, which is why we have not changed our guidance at this point in time, other than confirming our zero or flat to 9%.
But we feel comfortable about that. And hopefully, we will have more to say at the end of the second quarter.
James Hardiman: That’s great color. Maybe just a point of clarification, so is it safe to assume that given the touring focus of the new products that the U.S. market is going to outperform the rest of the world pretty meaningfully, any way to think through that for the year.
Jochen Zeitz: Well, I don’t want to predict what the international markets are going to say or are able to deliver. But I would say there is likely some outperformance in North America for the entire year. I think that’s realistic to assume.
James Hardiman: Got it. Appreciate the color Jochen.
Operator: Our next question comes from Tristan Thomas-Martin from BMO Capital Markets. Please go ahead. Your line is open.
Tristan Thomas-Martin: Good morning. Just going to – two questions. One, just kind of curious, I know weather, it seems like in some dealer checks has had some impact in dealers in some regions and some regions have had better weather. So, anything you can maybe call out there in terms of just kind of overall normalized good weather retail. I am also just curious about Flex financing. Have you seen any adoption? And do you have any targets for that? Thanks.
Jochen Zeitz: Yes, good weather retail, I will put that into my vocabulary. That’s a good one. Unfortunately, there is never all good weather retail, I am afraid. And we have certainly seen some of the bad weather throughout the quarter in all markets. Take California as an example, it’s been terrible weather with floods and rains pretty much throughout the quarter. So, that hasn’t helped to kick California into GEA. And then sporadically, winter storms and everything have noted by [ph] either. But I don’t want to sort of play the weatherman here. I would say, overall, it’s certainly not been supportive. And that’s why now really counts in terms of writing season. We are pleased that overall, where there was good weather, we saw strong momentum, and we hope that that momentum continues.
But overall, I don’t think it’s been supportive and when the weather was bad, the numbers were not that great when the weather was good, the numbers were great. So – and it certainly played out that way throughout North America in the first quarter.
Jonathan Root: Yes. And Tristan, I will take your question on HDFS Flex financing. So, from a Flex financing perspective, we have recognized that as we roll out anything that’s significant from a product perspective, it does sort of require an entire retraining of the dealer body and the sales process. And so as we think through that, our expectations are fairly muted in terms of the impact that, that would have on 2024. And we really think it will take us 12 months, 18 months, even up to 24 months to kind of get the full dealer network behind it, fully embracing and then salespeople across the entire United States really understanding how to insert that into the sales process, how to have the right conversation with the customer.
So, we want to be sensitive to the fact that we don’t want to prolong the sales experience for our consumers, but we do want them to understand optionality. I think the good news is that it is a triple number – a triple-digit number of dealers who have who have already executed one of those products and kind of sold that through to the consumer. So, uptake will take some time. But we are pretty pleased with what we are starting to see and the response that we are getting so far from the dealer body.
Tristan Thomas-Martin: Thank you.
Operator: Our next question comes from Noah Zatzkin from KeyBanc. Please go ahead. Your line is open.
