Harley-Davidson, Inc. (HOG) on Q1 2023 Results - Earnings Call Transcript
Operator: Thank you for standing by, and welcome to the Harley-Davidson 2023 First 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, Gina Goetter; and we also have LiveWire President, Ryan Morrissey. In addition, for the Q&A portion of today's call, we will have Harley-Davidson Chief Commercial Officer, Edel O’Sullivan; and we will also have Harley-Davidson's soon to be Interim Chief Financial Officer, David Viney. With that, let me turn it over to our CEO, Jochen Zeitz. Jochen? Jochen Zeitz: Thank you, Shawn, and good morning, everyone. Thank you for joining us today for our Q1 2023 results. Harley-Davidson delivered a solid start to '23, the third year of our Hardwire strategic plan with consolidated first quarter revenue up 20% to $1.789 billion, driven by HDMC. We're pleased with our start to the year and with the execution of our strategic plan through the quarter. In this, our 120th anniversary year, we anticipate momentum to build over the year. However, we maintain a measured outlook on the wider economic picture. Harley-Davidson continues on its transformational journey. As we've said before, through the foundational work of the Rewire and the execution of the Hardwire, we've changed our overall approach and focus as a business on prioritizing unit growth at all costs to more holistic view on profitable growth. The Hardwire emphasizes stronghold categories that we believe are the most profitable motorcycle segments globally as well as selective expansion opportunities, placing an overriding focus and desirability that reflects the premium nature of our brand and product. As we navigate the evolving macro environment, we will remain committed to these principles instead of a chase for volume for volume's sake in our core categories. We also remain confident in the innovation pipeline that will power our future. We continue to work with our dealers to ensure our activities and fairs are aligned to healthy demand generation, especially in the current consumer environment. The programs were designed and are implementing share 4 goals: generate demand and traffic to our dealerships and digital properties; provide tools and options to address concerns around affordability; ensure proper management of inventory in its life cycle; and reinvigorate sales effectiveness after a couple of years of lower product availability. Desirability remains at the heart of our strategy. We believe a highly promotional approach would negatively impact profitability in our most premium categories. So we continue to focus on activities that motivate the customer to engage with our dealers to find the right bike for them. Our season opener on March 25, which saw over 90% of the network participating is a great example of this. And we intend to continue to focus on marketing, lead generation and messaging that is aligned with our strategy. Now I'll highlight select pillars of the strategy, starting with Pillar 1, profit focus. With the Hardwire, we made a commitment to strengthen and grow Harley's leadership in our strongest smaller cycle segments, namely touring, large cruiser and trike. Not only are these segments the most profitable in the market globally, but we also believe these segments offer potential to inspire more engagement while compelling new customers and riders to choose Harley-Davidson. Aligned to this focus in January, we kicked off our 120th anniversary with the first reveal of our '23 lineup, celebrating 120 years of Harley-Davidson pride and craftsmanship. This initial release included the CVO Road Glide limited anniversary model and 6 additional limited edition motorcycles, featuring exclusive 120th anniversary commemorative paint finishes and details. The release also included a refreshed Harley-Davidson breakout performance cruiser, the exciting Road Glide 3 trike model and new Nightster special middleweight sport motorcycle and the [restarted] Freewheeler trike model. We also made a commitment to introduce limited edition motorcycles that align with our strategy to increase desirability and to drive the legacy of Harley-Davidson. With that in mind, for our second reveal of the year, I'm excited to announce that next week, we will be launching additions to our icons and enthusiast collections. Stay tuned for more. At the same time, we retired the EVO Sportster in North America, a model that was cherished over the last 65 years, but has been carrying negative margins for the Motor Company for many years. It is important to note that the phaseout of Sportster and the cadence of CVO model rollout throughout the year has created a different retail unit volume dynamic in '23 versus prior years. And while RevMAX will be able to compensate in part for the EVO Sportster, we need to consider the different price and overall positioning. The company also continues to selectively focus on opportunities in segments aligned with the company's product and brand capabilities that demonstrate a path to market leadership and profitability. In redefining our geographic footprint, we made a commitment to strategically drive target markets to their full potential by developing custom product and go-to-market approaches. With that in mind, we have been encouraged by the reception of our HDX 350 and 500 bikes available currently in APAC. We believe this launches a new vector for growth in select markets for a new customer, and we are excited for future opportunities. Under our growth beyond bikes pillar, we know that parts and accessories, apparel and licensing and Harley-Davidson Financial Services are important components of the company's future success as a global lifestyle brand and provide untapped potential to grow our customer base and add to customer lifetime value. For Parts & Accessories, despite lower retail volume, we continue to drive meaningful P&A metrics and so growth in the service ROs in our dealerships as part availability improved with gross margin expanding in Q1. For apparel and licensing in January, we successfully launched our 120th anniversary collection, and in February, we introduced HD collections, the grouping of lifestyle apparel lines, defined by the heritage and craftmanship synonymous with Harley-Davidson. Bringing together the many facets of motor culture, while paying tribute to our heritage, we are focused on building the Harley-Davidson Apparel & Licensing business, while gradually increasing and expanding the overall lifestyle apparel offering of our brand. To improve customer experience, we remain committed to major strategic priorities in dealer facility upgrades, enhanced omnichannel offerings and revamped motorcycle distribution capabilities, which we expect to roll out throughout '23 and '24 as well as a renewed focus on HD experiences for our riding community and brand aficionados as we ramp up our 120th anniversary celebrations, but more about that later this year. In summary, while overall patterns of traffic and demand as well as other metrics of consumer health showed some restraint in Q1. We believe that we can deliver on our expectations in year 3 of our Hardwire strategy and are excited for what lies ahead for our company and brand. We remain committed to our strategic focus on innovation and profitability under broader banner of desirability as a premium brand in the sector. Before I hand over to Ryan, in January at our model year launch, I also said that everyone should stay tuned for more. As we committed to innovate in our core categories as part of our new strategy, I'm pleased to highlight yesterday's kickoff of a new era of CVO Touring bikes, the subject of huge amounts of Internet intrigue already. Building on our commitment to invest in our core categories, yesterday, we started teasing the next generation of our CVO Touring motorcycles that will lead us into the future. In 1969, Harley-Davidson introduced the Batwing Fairing to the Electra Glide, a spark that would ignite a new generation of Harley-Davidson motorcycles that will define the Grand American touring category and the lineage of motorcycles cherished by generations of riders that followed. The legacy lives on today with 2 of Harley-Davidson's most iconic motorcycles in history the Street Glide and Road Glide with DNA can be clearly traced back to the 1969 Electra Glide. Over the decade Harley-Davidson designers and engineers have thoughtfully evolve these motorcycles, introducing incremental improvements to further enhance the riding experience while carefully respecting the heritage and position as icons within the hearts and minds of enthusiasts around the world. Since 1999, the most aspiration of these models have been forged from Harley-Davidson Custom Vehicle Operations, CVO, the collection of limited production motorcycles that deliver the ultimate and refinement of styling, design, craftsmanship and attention to detail, along with top-of-the-line performance. With the introduction of the all-new CVO Street Glide and CVO Road Glide, we've completely reimagined two of Harley-Davidson's most iconic motorcycles, and we've redefined the boundaries of CVO in the process. By rethinking these two models from the ground up, we are ushering in a new area of innovation, design, engineering and technology while expanding the definition of Harley-Davidson CVO and taking the Grand American touring experience to another level. The new CVO Street Glide and CVO Road Glide break the mold and reset the bar for the Pinnacle Harley-Davidson riding experience. We'll be sharing more about these motorcycles at our official launch in June. Now I will hand over to Ryan Morrissey, President of the LiveWire to provide an update on the quarter at LiveWire. Ryan? Ryan Morrissey: Thank you, Jochen. Good morning, everyone. As we close the first quarter of 2023, LiveWire is intensely focused on the final stages of bringing the brand to Europe and moving the Del Mar into production. Our launch events this week in Paris, London, Berlin and Amsterdam bring these two major efforts together and introduce European riders to the next great addition to the LiveWire portfolio. In addition to building up our European [indiscernible] team, we have contracted with over 30 retail partners to join us in the field and take on a complementary role in our marketing, sales and service efforts. We've also announced U.S. pricing for the Del Mar, in line with our original ambition for the bike, and the addition of a launch addition for Europe. Overall, we are very pleased with the reception to Del Mar in both the media and potential customers that are impressed by the technology in combination with the accessibility of the price point. We are moving into the final stages of preparing for production and expect to deliver the first bikes in the third quarter of 2023 as we communicated earlier this year. In terms of our business plan, we are within our expected parameters for the year with continued focus on getting new products to market and maximizing conversion of the reservations we collected since announcing the Del Mar in the U.S. last year. And now I'll hand it over to Gina Goetter to talk through the financial performance of Harley-Davidson and LiveWire in greater detail. Gina? Gina Goetter: Thank you, and good morning, everyone. Q1 2023 is the second full quarter under our new reporting structure with the 3 segments of HDMC, HDFS and LiveWire. Despite the decline in retails, the financial performance finished ahead of expectations. Pricing actions, unit mix, productivity and prudent cost management attributed to the significant HDMC margin increase versus prior year. Turning to our financial results in the first quarter. Total consolidated HDI revenue of $1.8 billion was 20% higher than last year, with growth across HDMC and HDFS and a decline in LiveWire. HDMC revenue growth was driven by wholesale motorcycle unit growth of 14%, coupled with continued pricing realization across the portfolio. Harley-Davidson Financial Services segment revenue was up 16% versus prior year, up higher finance receivables. And the LiveWire segment decline of 25% was a result of lower volume across both electric motorcycles and electric balance bikes. Total consolidated HDI operating income was $370 million and $80 million better than prior year. HDMC operating income of $336 million was 53% higher than the prior year, driven by the growth in revenue, coupled with gains in operating margin. HDFS operating income of $58 million declined by 32%, driven by higher interest expense and higher credit losses as macro conditions softened. And finally, LiveWire operating loss of $25 million included a step-up in product development investment behind the launch of the Del Mar product and increased operating expense associated with standing up the new company. First quarter earnings per share of $2.04 compares to $1.45 last year as a result of the factors noted above as well as continued favorability in the below-the-line items. Global retail sales of new motorcycles were down at 12% versus the prior year. North American Q1 retail sales declined 17% due to a combination of [staggered rollouts] for our new products and anniversary models as well as a shift in the customer mindset given the current macro environment. APAC Q1 retail sales grew by 3% as we continued to experience strong demand across key markets, including high single-digit growth in Japan. EMEA Q1 retail sales declined by 6%, a decline that was primarily driven by our exit from Russia as well as the planned shift of our unit mix to focus on more profitable units. As a result of this unit mix shift and improving FX rates, overall EMEA profitability improved. Excluding Russia, EMEA retail was down 1%. Latin America Q1 retail sales declined by 25% and was adversely impacted by regional economic conditions. However, even though retail units were down, we continued to deliver higher levels of profitability for the region. Improved production in the first quarter of 2023 and in the second half of last year has allowed us to improve product availability at our dealer network ahead of riding season. On a year-over-year basis, average inventory was up 70%, with the increase primarily attributed to healthier inventory levels compared to the very tight 2022. Inventory continues to be materially down versus both 2020 and 2019. And from a retail pricing standpoint, U.S. new motorcycle transaction prices finished within our desirability threshold of plus or minus 2 percentage points of MSRP. Looking at revenue, total HDMC revenue increased 21% in Q1. Focusing on the key drivers through the quarter, 12 points of growth came from volume driven by wholesale unit growth, 8 points of growth came from pricing and lower incentives through both global MSRP increases and pricing across the parts and accessories and apparel businesses. Mix contributed 3 points of growth as we continue to prioritize our most profitable models and markets, and finally, 2 points of negative impact came from foreign exchange. Looking more closely at margins, as a reminder, our commentary is now based on the updated definition of HDMC which excludes LiveWire. HDMC gross margin in the first quarter was 35.8%, which compares to 31.5% in the prior year. The improvement of 4.2 points was driven by pricing, unit mix and cost productivity, offsetting the impact of cost inflation and foreign exchange headwinds. We continue to see the supply chain environment improve, and we experienced more modest cost inflation, which was approximately 2%. On a year-over-year basis, the deceleration continued to be largely driven by logistics, including lower expedited shipping expenses and freight rates. Raw materials and metal markets have also continued to moderate. HDMC operating margin improved to 21.6% in Q1 from 16.9% in the prior year. The improvement was driven primarily by the factors already noted. HDFS operating income in Q1 was $58 million, down 32% compared to last year. The Q1 decline was driven by higher borrowing costs and higher credit losses. In Q1, HDFS' annualized retail credit loss ratio increased to 3.2%, which compares to an annualized loss of 1.9% in fiscal 2022. The increase in credit losses was driven by several factors relating to the current macro environment. In addition, the retail allowance for credit losses for the first quarter remained steady at 5.1%. Total retail loan originations in Q1 were down 15% while dealer inventory financing or wholesale receivables were up 88% to $1.2 billion behind stronger product availability compared to prior year. Total quarter end net financing receivables, including both retail loans and dealer inventory financing, was $7.6 billion, which was up 11% versus prior year. Total interest expense in Q1 was up $31 million or 75% versus prior year. The increase was driven by higher average debt outstanding and a higher cost of funding. During Q1, we raised $1.25 billion in the capital markets. And at the end of the quarter, cash and committed bank in conduit facilities resulted in an HDFS liquidity position of $2.8 billion. This, together with the subsequent Euro MTN deal that we completed in April, has put HDFS in a very strong position from both a funding and liquidity position. For the LiveWire segment, first quarter revenue decreased by 25% from $10 million to $8 million, with the majority of the decline driven by its channel partners for electric balance bikes taking a more conservative approach to inventory. Operating loss of $25 million was in line with expectations, with the step-up in loss versus prior year attributed to the continued investment in product development related to the company's Del Mar platform and the delivery of its second electric motorcycle. Operating losses also incorporate the added cost of standing up a new organization. Wrapping up with Harley-Davidson, Inc. financial results. In the first quarter, we delivered $47 million of operating cash flow which was down from $139 million in the prior year. The decrease in operating cash flow was due primarily to an increase in receivable originations related to the timing and volume of wholesale shipments in Q1 2023. Total cash and cash equivalents ended at $1.6 billion, which is $167 million higher than at the end of Q1 prior year. This consolidated cash number includes $236 million from LiveWire. Additionally, during the first quarter, as part of our capital allocation strategy, we bought back 2 million shares of our stock at a value of $84 million. As we look to the rest of 2023, we are reaffirming our full year guidance, which expects HDMC revenue growth of 4% to 7%. The growth forecast incorporates approximately 2 points of unit growth, 1 to 2 points of mix as we continue to focus on our profitable core business and 1 to 2 points of pricing as we offset a more moderated inflationary outlook. Furthermore, we continue to expect the parts and accessories and apparel and licensing businesses to support top line growth in line with our Hardwire strategy. We continue to expect HDMC operating income margin of 14.1% to 14.6%. We believe the anticipated positive impact from pricing and the cost productivity efforts within supply chain will offset expected cost inflation and currency headwinds. We expect HDFS operating income to decline by 20% to 25%. At this time, despite the continuation of higher losses in Q1, we are holding to our original guidance. There is risk that losses could stay high throughout the year. However, we have several actions underway that should help to improve the total annualized realized losses, including increased investment behind collections and stronger repossession efforts. We believe it is prudent to keep deeper into core riding season to assess the impact of loss rates for the year. There is no change to our LiveWire segment guidance. We continue to expect unit sales between 750 and 2,000 units, and an operating loss range of $115 million to $125 million. This forecast incorporates the updated launch timing on the new Del Mar product. 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 enhancement. Through the first quarter, we have seen cost inflation generally in line with our expectations and continue to expect in aggregate about 2 to 3 points of inflation compared to 4% in 2022. Labor and warehousing costs continue to be the primary drivers of inflation with the deflation of moderation expected within logistics, freight and raw materials. We have continued to see improvements in supplier performance, which is also contributing to efficiency across the supply chain, and we remain on track to deliver our in-year cost productivity goal. From an annual cadence standpoint, we expect high-teens revenue growth in the first half for HDMC as well as high-teens operating margin as we lap the production shutdown from last year. We expect HDMC back half revenue and operating income to be down year-over-year as we get back to more normalized production and seasonality compared to what we experienced in 2022. For HDFS, we expect the operating income declines to moderate in the back half of the year as loss rates come down in line with historical seasonality patterns, and we begin to lap the interest rate increases in 2022. As we look to 2023 capital allocation, 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 quarter despite a challenging retail environment, and we remain focused on achieving our targets throughout this year. And with that, I'll turn it back to the operator to take your questions. Operator: [Operator Instructions] And your first question comes from the line of Robbie Ohmes of Bank of America. Operator: Your next question comes from the line of Craig Kennison with Baird. Operator: Your next question comes from the line of Joseph Altobello with Raymond James. Operator: Your next question comes from the line of James Hardiman with Citigroup. Operator: Your next question comes from the line of Gerrick Johnson with BMO Capital Markets. Operator: Your next question comes from the line of Noah Zatzkin with KeyBanc Capital Markets. Operator: Your final question comes from the line of David MacGregor with Longbow Research. Operator: Your next question comes from the line of Brandon Rolle with D.A. Davidson. Operator: You have a follow-up question from Robbie Ohmes of Bank of America. Operator: You have a follow-up question from James Hardiman with Citigroup. Operator: There are no further questions at this time. I would now like to turn it back over to Jochen Zeitz for some closing remarks. Jochen Zeitz: Well, thank you, everybody, for joining us today. As Robbie alluded to, Gina will be leaving us at the end of this month, and this is her last quarterly call. I'd really like to take the opportunity and thank her very much for her service to the company since she started in 2020. Wish her the very best in her new role, and she will certainly be missed. Thank you all again for joining us, and have a great day. Operator: This concludes today's conference call. You may now disconnect.HOG Ratings Summary
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Harley-Davidson Stock Surges 5% on DA Davidson Upgrade
Harley-Davidson (NYSE:HOG) shares gained nearly 5% pre-market today after DA Davidson upgraded the company to Buy from Neutral and increased its price target to $47.00 from $38.00. The decision to adopt a more bullish stance was influenced by positive feedback from the motorcycle industry checks.
According to DA Davidson, their latest round of checks revealed a more optimistic sentiment from dealers compared to the previous assessment in May. It appears that April was likely the weakest month of the quarter for the company, as retail performance gradually improved throughout the second quarter. Furthermore, dealers made significant progress in clearing non-current inventory, and early indications suggest that pre-order demand for Harley-Davidson's new custom vehicle operation (CVO) product launch is surpassing expectations.
Looking ahead to Harley-Davidson's upcoming earnings release on July 27, DA Davidson believes that the company is positioned to surpass the relatively low expectations surrounding retail performance, second-quarter earnings, and their outlook for the second half of 2023.
Harley-Davidson Shares Surge 12% on Strong Q3 Beat
Harley-Davidson (NYSE:HOG) shares rose more than 12% on Wednesday following the company’s reported Q3 results, with EPS of $1.78 coming in better than the Street estimate of $1.41. Revenue was $1.65 billion, beating the Street estimate of $1.37 billion.
The company reaffirmed its fiscal 2022 guidance, expecting HDMC revenue growth of 5-10% with an operating income margin of 11-12%.
According to the analysts at RBC Capital, the company had a really strong performance in the quarter, and no doubt that its turnaround efforts are taking hold. Management has gotten the company to a much better place to execute on demand, and demand seems to be OK for now, but tough to have a ton of confidence in 2023 given macro uncertainty and headwinds. The analysts raised their price target on the company's shares to $42 from $37 while maintaining their Sector Perform rating.
