HARLEY-DAVIDSON Earningcall Transcript Of Q2 of 2024
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. Page 1 Jochen? Jochen Zeitz -- Chairman, President, and Chief Executive Officer 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% of 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 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 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. Page 2 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 dealer's floor plan expenses. Our performance in the first half of the year continue 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 the -- in share in the 601+CC market at the backdrop of an overall declining industry in Q2 and year-to-date, while Harley-Davidson touring being up 5.3 percentage points in share and over 11% in unit growth. As we look at our customer, 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 complement with partnerships. Looking at our partnership with Hero, we Page 3 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 at the last quarter, we plan to continue to 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 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 age customer profile. Page 4 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 five years were made to customers 35 and younger, with 75% 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 learned 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 Page 5 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 toward 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, 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. Karim Donnez -- Chief Executive Officer, LiveWire 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 Page 6 quarter of 2023. Retail sales outpaced wholesale again in the second quarter, making LiveWire the No. 1 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, they're 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. Jonathan Root -- Chief Financial Officer 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 Page 7 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. In addition, 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 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. Page 8 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. Four 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 seven points of growth as we continued to prioritize our most profitable models and markets. And finally, one 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 to 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. Page 9 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 prior year. HDMC operating margin of 15.4% through the first half was 3.8 points lower than 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 Page 10 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 Page 11 receivables, including both retail loans and commercial financing, was $8 billion, which was up 7% versus 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 motorcycles 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 Page 12 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 ships, but also as a year to improve balance sheet efficiency. As it has become clearer, that volume will be toward 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 it's greater than we originally estimated, but we believe positions the company more appropriately for 2025, frees up additional cash and reduces obsolescent 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 Page 13 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 had 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 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. Questions & Answers: |
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