Harley-Davidson, Inc. (NYSE:HOG) Q2 2023 Earnings Call Transcript
Harley-Davidson, Inc. (NYSE:HOG) Q2 2023 Earnings Call Transcript July 27, 2023
Harley-Davidson, Inc. beats earnings expectations. Reported EPS is $1.46, expectations were $1.25.
Operator: Thank you for standing by and welcome to the Harley-Davidson 2023 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.
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 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 we also have 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?
Jochen Zeitz: Thank you, Shawn. Good morning everyone and thank you for joining us today. Our Q2 results showed progress on the delivery of our Hardwire strategy despite a difficult macro environment and the unexpected production suspension impacting the business. Revenues were down 2% in the second quarter, driven by a revenue decline of 4% at HDMC, which was partially offset by revenue growth of 19% at HDFS. Despite the challenges, we saw global new motorcycle retail growth of 3%, with North America up 1% versus prior year and solid international growth, especially in APAC, where we delivered a 24% increase in retail sales versus prior year. Before we turn to our delivery against our Hardwire pillars, there are three points I'd like to make about our performance for the quarter.
Firstly, we remain focused on growing our most profitable categories versus just growing total units. In addition to the impact of the unplanned production suspension, Q2 total units have been impacted by portfolio choices in line with our strategy, including the shift of our second CVO launch to later in the year and most notably with the sunset of the Sportster in North America. While we intend to continue to participate in the small cruiser segment, leveraging both used and our RevMax platform, our priority is to grow profitably in our leading segments. And while we expect RevMax to grow over time as customers become familiar with the new engine, we will continue to make choices consistent with our strategy, namely, defending profit over retail units.
Secondly, across our main geographies, we've seen clear impacts on customer demand and affordability, with rising interest rates giving force to high-credit customers, in addition to higher monthly payment challenges across the board. We've also seen the impact of inflation on discretionary purchases. We continue to work through all the challenges with a diligent focus on our most profitable categories and prudent investments in demand generation. On this note, we're investing in supporting a message of affordability, but protecting profitability by focusing on our core categories. We continue to work with our dealers to design programs that drive traffic and help our more slowing customers with trade-ins and rates. Third, we remain committed to desirability as we manage the dynamics of the year.
We continue to monitor inventory levels in the channel, as well as MSRP price realization, while managing production and inventory mix to protect the long-term health of the business. Undoubtedly, the production suspension late in the quarter created some unexpected challenges to that balance. An uneven production ramp-up based on parts availability and the high popularity of some models has led to uneven mix in the channel and units that are delayed versus our original estimates. However, we plan to work to correct the situation in the second half of the year. Our focus on desirability, managing mix and prioritizing profitable growth of overall unit growth has driven an improvement in our HDMC gross margin to 34.8% this quarter. Now, I'll highlight select pillars of the Hardwire, starting with pillar one, profit focus.
Our performance in the first half of the year continues to be aligned to our Hardwire strategic pillar profit focus, with strong mix and growth in our most profitable categories, with Touring and Trike up 10%; and Cruiser up almost 22%, with these categories now representing 85% of the total volume versus 76% in the first half of 2022. Building on our commitment to strengthen and grow our leadership in our stronghold motorcycle segments, namely Touring, Large Cruiser, and Trike, in April, we introduced the new CVO motorcycles, the CVO Street Glide and CVO Road Glide, with the motorcycles formally launching in June and first test rides being conducted as planned during our 120th Homecoming Anniversary in Milwaukee. By rethinking these two models from the ground up, we've advanced every aspect of the Grand American Touring motorcycling experience.
These models set a new standard for Harley-Davidson's performance, technology, and style, accelerating the evolution of the world's most desirable motorcycle brand. The global launch was met with a strong response from our customers, with over 40% of the volume already pre-booked before the motorcycles arrived in US dealerships. Also aligned to profit focus, building on our commitment to introduce a series of motorcycles that align with our strategy to increase desirability and to drive the legacy of Harley-Davidson, in May, we introduced the latest from our Enthusiast and Icons collections. The 2023 addition to the Enthusiast collection was the Fast Johnnie, a celebration of muscle car culture and its racing heritage, featuring factory-direct custom paint and graphic treatments across the three Harley-Davidson models; the Low Rider ST, the Street Glide ST, and the Road Glide ST.
For the third installment of the Icons Motorcycle Collection program, we launched the Electra Glide Highway King, inspired by the 1968 FLH Electra Glide model. We've seen a strong customer reception to both collections, with most selling out ahead of delivery. Pillar two, selective expansion. The company continues to selectively focus on opportunities in segments that we believe have a path to in-market success and profitability, capitalizing on our brand strength, product capabilities, and selectively complemented with partnerships. Building on the launch of the HDX 350 and 500 in APAC early in the year, in July, we successfully launched the X440 in India. The launch marked the start of a new chapter in India for Harley-Davidson and the first product as part of our partnership with Hero MotoCorp, which began in 2020.
We've been extremely pleased with the reception that the X440 has received since launch, with preorders exceeding initial expectations from launch. Pillar five, customer experience. The Hardwire puts customers at the forefront of Harley-Davidson's products, experiences and investments and defines customers as people who may dream of motorcycling or just learning to ride, all the way to riders who are deeply passionate about and invested in the Harley-Davidson lifestyle. With that in mind, following our successful introduction of our pre-owned marketplace in 2021, we've now expanded with new capabilities to search and configure new motorcycles online. Additionally, we introduced HD Membership in June, a new industry-leading community platform and membership program designed to enable all motorcycle riders, motor culture, and Harley-Davidson fans to connect, engage, and ride with one another while personalized benefits, rewards, and experiences.
First level, Harley-Davidson Membership is free to join, offering multiple ways for members to tailor their experiences, engage with the Harley-Davidson community, and earn rewards. Members who look to further enhance their experience and benefit package may elect to add the Access Pass for riders and non-riders, with exclusive access to key brand events and content as well as benefits such as enhanced rewards and partner benefits. Another option for riders of any motorcycle is the Rider Pass, which includes tools, content, and benefits such as roadside assistance, motorcycle service benefits and partner benefits to enhance the riding experience. And lastly, our Harley Owners Group received several key enhanced program benefits. Since launch, over 125,000 Harley-Davidson membership profiles have been created, with majority being new members not previously Harley Owners Group-affiliated.
We've also increased our hub renewal rates since the launch of HD Membership. We're excited for what this capability will bring in terms of building and activating ridership. In 2022, we announced the launch of our Project Q program, an initiative to redefine the Harley-Davidson customer experience, leading with footprint transformation to provide a much-needed redesign of our dealerships. In Q2, we launched our first updated dealership in North America as part of the program designed to transform the in-person customer experience in addition to providing enhanced omnichannel purchase capability for new bikes and parts and accessories. In the coming quarters, we will start a steady cadence of updated dealerships coming online with the expectation that the full network domestically and internationally will be updated over the 10-year cycle.
Before I hand it over to Karim, our new LiveWire CEO, I wanted to share my conviction in our strategy. As we evaluate the first half of the year, it's clear that despite the challenging macroeconomic environment for the business and our customers, we're making progress in our core Hardwire objectives. We're proud of several standout launches this year, including our Road Glide 3 breakout anniversary models, but more significantly, our transformational CVOs, delivering on our Hardwire promise of innovation as part of our focus on core categories. We're also proud of the ongoing success of our Large Cruiser category, with one specific example being the Low Rider ST, which is resonating with the younger riders, showing a new path forward in the categories we proudly lead.
Hero MotoCorp and QJ are solid examples of innovative participation models in geographies that matter as part of our selective expansion strategy. Overall, we have been pleased by the reception, with orders exceeding expectations from launch. Importantly, these partnerships not only increase ridership, but bring new riders directly to the Harley-Davidson brand. In the first half, both Parts and Accessories and Apparel and Licensing together continue to grow as complementary offerings to our motorcycle product, underscoring our growth beyond bike focus. With our dedication to optimizing the customer experience, in addition to our fuel program, we are transforming our omnichannel capabilities and the pre and post-purchase journey. We continue to invest in improving our allocation and distribution model, which will improve our efficiency in the future.
The Hardwire is underpinned by our key strategic principles of profitability and desirability. 2023 is a year where we continue to demonstrate our commitment to both by driving the most profitable segments of the market where we command share and by prioritizing the long-term health of the business. These principles remain the foundation to what we intend to deliver with the remainder of Hardwire. We will continue to adjust according to the macroeconomic realities that we expect to play out through the change in the business environment. However, we remain committed to our six-pillar Hardwire strategy. Thank you. And with that, I'll hand it over to Karim to talk LiveWire.
Photo by Zakaria Zayane on Unsplash
Karim Donnez: Thank you, Jochen. Good morning everyone. I'm happy to be with you to talk about LiveWire. Thanks to the investments already made and the continued support from our shareholders, I believe LiveWire is poised to have a massive impact into the electrification of the industry. As we report on the second quarter of 2023, LiveWire is moving the S2 Del Mar into production and launching the brand in Europe. The Del Mar is the first bike on the ST platform, with the core EV systems and software developed from the ground up by the LiveWire engineering team. We've seen strong customer insurance in the new design and the advanced technology offered by the bike that we've been working on for the past five years. The price point of just above $15,000 makes the LiveWire brand more accessible to a broader segment of riders.
We believe anticipation for the Del Mar contributed to lower year-on-year volumes of LiveWire ONE as riders waited to learn more about our latest entry. We're happy to report that we've been building powertrains in Wisconsin over the past few weeks and the first bikes have been assembled on Line 3 in North Pennsylvania just this week. We look forward to ramping up production throughout August and getting early customers on the road. Over the next two years, we expect the ST platform to expand, continuing to build on our momentum. With LiveWire ONE now available in Europe, Del Mar will soon follow. Our retail partners are up and running in our four priority countries following the launch of the brand in the second quarter, with successful events in Paris, Berlin, London, and Amsterdam.
We look forward to the region becoming a critical piece of the LiveWire growth. Our investment and associated expenses were in line with our plan for the quarter. We believe the business is currently well-financed for the next stages of our development, with $260 million in cash and cash equivalents at the end of the quarter and the option to access $200 million under a nonbinding term sheet with Harley-Davidson. And now, I'll hand it over to Jonathan.
Jonathan Root: Thank you and good morning everyone. The second quarter of 2023 is the third quarter under our new reporting structure with the three business segments of HDMC, HDFS, and LiveWire. In Q2, we experienced the impact of an unplanned production suspension at our US manufacturing operations, where global wholesale shipments decreased by 10% year-over-year. Yet global pricing was able to partially offset unit declines, allowing us to turn in a strong margin performance as unit mix and productivity are key areas of focus. In addition, we continue to invest into building core competencies in our Hardwire pillars. Turning to our financial results in the second quarter. Total consolidated HDI revenue of $1.4 billion was down 2% compared to last year.
The components of this were, at HDMC, revenue declined by 4%. At Harley-Davidson Financial Services, revenue grew by 19%, and at LiveWire, revenue declined by 44%. Total consolidated HDI operating income was $221 million, which was $56 million lower than the prior year. The components of this were, at HDMC, operating income of $194 million was 8% lower than the prior year; at Harley-Davidson Financial Services, operating income of $59 million declined by 31% on a year-over-year basis; and at LiveWire, an operating loss of $32 million was in line with our expectations. Second quarter earnings per share of $1.22 compares to $1.46 last year as a result of the factors mentioned above. As we flip the page to first half results, total consolidated HDI revenue of $3.2 billion was up 9% compared to last year.
The components of this were, at HDMC, revenue increased by 8%; at Harley-Davidson Financial Services, revenue grew by 17%; and at LiveWire, revenue declined by 35%. Total consolidated HDI operating income was $591 million, which was $24 million higher than the prior year. The components of this were, at HDMC, operating income of $530 million was 23% higher than prior year, reflecting a strong operating margin of 19.2% in the first half of the year. At Harley-Davidson Financial Services, operating income of $117 million declined by 32% 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 of $3.27 compares to $2.91 last year, or up 12% versus the first half of 2022 as a result of the factors noted above, as well as consistent share buybacks throughout the first half of 2023.
As Jochen mentioned earlier, global retail sales of new motorcycles were up 3% versus the prior year. In North America, Q2 retail sales grew by 1%, driven by strength in core categories, such as Touring and Cruiser motorcycles, which were up 7% in Q2. This was offset by declines in the Sport motorcycle category following the discontinuation of our legacy Sportster models at the end of 2022, resulting in less units in the market than the year before. In Asia-Pacific, Q2 retail sales grew by 24% as we continued to experience strong demand across a variety of markets. In EMEA, Q2 retail sales declined by 6%, driven by the planned unit mix shift towards profitable core product segments. Core categories were up 7% in the EMEA region in Q2 and overall profitability continued to improve.
In Latin America, Q2 retail sales grew by 4%, driven by growth in Brazil that was partially offset by weakness in Mexico. Higher production in the second half of 2022 and in the first half of 2023 has allowed us to improve product availability at our dealer network over the last 12 months. On a year-over-year basis, average inventory in Q2 was up by more than 90% to healthier levels compared to the exceptionally tight level of 2022. Dealer inventory continues to be materially down versus 2019. From a retail pricing standpoint, US new motorcycle transaction prices finished within our desirability threshold of plus or minus two percentage points of MSRP. At the HDMC segment, revenue declined by 4%, primarily due to the production suspension at our US manufacturing operations that occurred primarily in Q2.
Looking at the HDMC revenue bridge and focusing on the key drivers for the quarter, 10 points of decline came from decreased volume at HDMC. This was driven by the 10% decrease in wholesale motorcycle unit shipments mentioned previously. Four points of growth came from pricing through both global MSRP increases and pricing across the Parts and Accessories and Apparel businesses. Mix contributed two points of growth as we continue to prioritize our most profitable models and markets. And finally, one point of negative impact came from foreign exchange. At HDMC, operating income of $194 million in Q2 was 8% lower than prior year, driven by lower wholesale shipments and higher operating expenses. As a reminder, our commentary is now based on the updated definition of HDMC, which excludes LiveWire.
Let's look more closely at HDMC margins. HDMC gross margin in Q2 was 34.8%, which compares to 30.9% in the prior year. The improvement of four points or 400 basis points was driven by pricing, cost productivity, and unit mix, more than offsetting the negative impacts from reduced volume and foreign exchange. We experienced more modest cost inflation, which was approximately 1% in Q2. On a year-over-year basis, the deceleration continued to be largely driven by logistics, including lower expedited shipping expenses and ocean freight rates. Raw materials and metal markets have also continued to moderate. HDMC operating margin came in at 16.2% in Q2 from 16.8% in the prior year. The decrease was due to higher operating expense, including higher people costs and marketing spend as planned.
For the first half of the year at HDMC, operating income of $530 million is a 23% increase compared to prior year. HDMC operating margin of 19.2% through the first half is 2.4 points higher than prior year. The increase is due to pricing, productivity and favorable mix more than offsetting FX and higher operating expenses. At Harley-Davidson Financial Services, revenue increased by 19%, driven by higher finance receivables, higher interest income, and increased investment income. HDFS operating income in Q2 was $59 million, down 31% compared to last year. The Q2 decline was driven by higher borrowing costs as well as higher provision for credit losses due to an increase in credit reserves and realized credit losses. In Q2, HDFS' annualized retail credit loss ratio came in at 2.6%, which is down from 3.2% in Q1 of this year.
During the quarter, losses followed the typical seasonality curve, with performance in line with expectations. These levels compare to an annualized loss of 1.9% in fiscal 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 second quarter increased to 5.3%, up from 5.1% in Q1, which is the level it had been during fiscal 2022. Total retail loan originations in Q2 were down 14%, while commercial lending receivables were up 54% to $936 million behind stronger product availability compared to prior year. Total quarter end net financing receivables, including both retail loans and commercial lending receivables, was $7.5 billion, which was up 6% versus prior year.
Total interest expense in Q2 was up $38 million or up 80% versus prior year. The increase was driven by a higher cost of funding, as lower interest rate debt matured and was replaced with current market-rate debt. During the first half of 2023, we raised approximately $2 billion in the capital markets and at the end of Q2, cash and committed bank and conduit facilities resulted in an HDFS liquidity position of $2.4 billion. We believe this has put HDFS in a very strong position from both a funding and liquidity perspective. For the LiveWire segment, second quarter revenue decreased from $13 million to $7 million due to lower unit sales of both electric motorcycles and the electric balance bikes. LiveWire operating loss of $32 million was, as Karim highlighted, in line with expectations and was driven by product development spending associated with the launch of the Del Mar electric motorcycle.
Wrapping up with Harley-Davidson and financial results. In the first half of 2023, we delivered $411 million of operating cash flow, which was up from $244 million in the prior year. The increase in operating cash flow was due primarily to less new working capital needs in the first half of 2023 versus the first half of 2022. Total cash and cash equivalents ended at $1.5 billion, which was $672 million lower than at the end of Q2 prior year. This consolidated cash number includes $216 million from LiveWire. Additionally, during the first half of 2023, as part of our capital allocation strategy, we bought back 4.1 million shares of our stock at a value of $156 million. As we look to the rest of 2023 based on our results to date and our business outlook, we are revising our HDMC guidance and the LiveWire segment unit sales guidance, while we are reaffirming our HDFS, LiveWire operating income, and HDI CapEx guidance.
At HDMC, we now expect HDMC revenue growth of flat to plus 3%. This revised forecast is in line with our overall strategy and addresses the impacts caused by the production suspension at our US manufacturing operations. HDMC operating income margin of 13.9% to 14.3%. We continue to believe the anticipated positive impact from pricing and our cost productivity efforts within the supply chain will offset expected cost inflation and currency headwinds. At LiveWire, we now expect unit sales of 600 to 1,000. This reflects the updated Del Mar motorcycle go-to-market timing. At LiveWire, we continue to expect an operating loss range of $115 million to $125 million. As we look to the rest of 2023, we are reaffirming our full year guidance for HDFS and HDI CapEx guidance.
At HDFS, we continue to expect HDFS operating income to decline by 20% to 25%. In Q2, we experienced lower realized credit losses than in Q1, 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, including licensing revenue and insurance revenue, which was up more than 30% in the first half of 2023. 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. Through the first half of the year, we have seen cost inflation generally in line with our expectations and continue to expect in aggregate about two points of inflation for the full year 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 $100 million in cost productivity in 2023, taking into account the adjustments in volume and updated production environment. For HDFS, we expect the operating income declines to moderate in the second half of the year as we begin to lap the interest rate increases that took effect in 2022. As we look at capital allocation for the remainder of 2023, our priorities remain to fund growth of the Hardwire 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 through the first half of the year, especially our margin performance, despite a complex retail environment.
And with that, I'll turn it back to the operator to take your questions.
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