Yahoo Finance Harley-Davidson, Inc. (NYSE:HOG) Q1 2024 Earnings Call Transcript
Harley-Davidson, Inc. (NYSE:HOG) Q1 2024 Earnings Call Transcript April 25, 2024
Harley-Davidson, Inc. beats earnings expectations. Reported EPS is $1.72, expectations were $1.48. Harley-Davidson, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Thank you for standing by and welcome to the Harley-Davidson First Quarter 2024 Conference Call. Please be advised that today's conference is being recorded. I would now like to turn the call over to Shawn Collins. Mr. Collins, 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 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 in our latest filings with the SEC. Joining me for this 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. Jochen?
Jochen Zeitz: Thank you, Shawn and good morning everyone. Thank you for joining us for our Q1 2024 results. Harley-Davidson delivered a good start to the year in line with our expectations. Looking at retail for the quarter, we are pleased with our delivery of 6% growth in North America, our largest and most important region. In Q1 we continue to see the impacts of the high interest rate environment on both consumer confidence and affordability. However, it is positive to seek customer enthusiasm for our motorcycles despite this challenging environment. Outside of North America, both the Europe and APAC regions were soft, mainly due to regional macroeconomic conditions. However, it is also worth noting that our 2024 product only started to arrive in the international regions in March and is just now making its way into most international markets.
And as the riding season is starting to get into gear, we're excited for our riders and fans both inside and outside of North America to get to experience the next era of Harley-Davidson Touring motorcycles. As usual, I will now briefly address select Hardwire strategic pillars and our delivery of them, starting with pillar one, profit focus. When we announced our Hardwire strategy back in 2021, we made a commitment to invest in our core categories and building on that commitment this year we ushered in a new area of motorcycle Touring by reimagining two of the most iconic motorcycles in history, the Harley-Davidson Street and Road Glide, with the most comprehensive product redevelopment in well over 10 years. Overall, we are very pleased with our new model year launch and in particular our newer Touring lineup, which is being received very positively by customers, dealers and media alike.
One outlet summarized the launch particularly well. The Motor Company took the motorcycling world by surprise with the release of the revamped versions of the Road Glide and Street Glide, completely different from their predecessors, a more modernized approach that made them superior to the previous generation in nearly every facet. The all new Street Glide and Road Glide models have set a new standard for the industry and the future of touring and adventure on two wheels with exceptional performance, cutting edge innovation and bold new design, representing the largest investment made by the Motor Company into a single platform. We believe that by elevating every aspect of performance, technology, comfort and style, we have without question created the most enticing touring motorcycles ever offered by Harley-Davidson.
We continue to see significant positivity for the product across the network and are excited for our riders to have full access to the lineup as the riding season gets underway. Included in our 2024 launch and designed to celebrate 25 years of custom vehicle operations, our CVO lineup expanded with the introduction of the all new CVO Road Glide ST, representing the pinnacle of Baggers [ph] performance and the CVO Pan America fully kitted out for extraordinary adventures. The CVO Road Glide ST is the lightest, fastest and most sophisticated performance Baggers [ph] ever produced by Harley-Davidson. Taking from our popular Low Rider ST offering, the CVO Road Glide ST combines West Coast custom style and performance trend that we've been fueling with the King of the Baggers Racing Series.
To quote another outlet, the CVO ST is the best motorcycle Harley-Davidson has ever put out. For 2024 we also reprised both the CVO Street and Road Glide models that we introduced during Homecoming last year in exciting new color options. The CVO Pan America is another new vehicle and the CVO program's first adventure touring motorcycle. All of the features that have made the Pan America 1250 special a leading choice among discerning global adventure touring riders have been retained, with the CVO Pan America being kitted out with an additional host of rugged accessories selected to enhance the journey. With the Hardwire, we also made a commitment to introduce a series of motorcycles that align with our strategy to increase desirability and to drive the legacy of Harley-Davidson.
With that in mind, this February during Daytona Bike Week, we revealed the latest additions to our limited edition Harley-Davidson Icons and the limited run Enthusiast Collection.
Hydra: Coming to your screens this summer, the film is scheduled to be released in the United States on June 21. For the 2024 Enthusiast offering, we celebrated both music and motorcycles with the release of the Tobacco Fade Enthusiast Motorcycle Collection, available across three models, the Low Rider ST, the Ultra Limit and the Tri Glide Ultra. Again, we've seen a very positive response from customers to these offerings just in time for the rising season to get well underway. Pillar 3 leading in electric. LiveWire continued to pioneer the EV segment with the launch of the S2 Mulholland all new electric cruiser, the second bike on the S2 platform. The bike has been met with a very positive response in the industry, as Karim will detail shortly.
We're also very pleased that LiveWire has become the market leader for on road EV motorcycles in the U.S. this past quarter. And with the company increasing its focus on vehicle and operational costs, it will also consolidate its operations in Milwaukee at Harley-Davidson's historic headquarter at Juneau Avenue. Turning to Pillar 4 growth beyond bikes. In February, through HDFS, we launched Harley-Davidson Flex Financing. For the first time in our history this innovative loan option provides an alternate way to purchase a Harley-Davidson motorcycle. By combining the benefits of attractive monthly payments, shorter terms and greater flexibility throughout the loan period, the product offers customers the ability to return the motorcycle at the end of the term, ready to replace or upgrade into their next Harley-Davidson purchase.
We are committed to putting customers at the forefront of our products and experiences. H-D Flex does just that, while providing them with another innovative financing option to make Harley-Davidson motorcycle ownership fit the individual budget and lifestyle. Pillar 5 customer experience. We are just under 100 days to go. Our second Annual Homecoming event will be taking place July 25 to 28. And last week we announced the full roster of performance with headliners including the Red Hot Chili Peppers, Jelly Roll and Hardy. Tickets are now on sale and we look forward to coming together with our community of fans, riders and their families to celebrate our brand of moto-culture and music and I hope to see many of you there. And lastly on Pillar 6 inclusive stakeholder management, we are looking forward to formally unveiling the new community park at our Juneau Avenue headquarters on June 24.
The project, which has been pioneered by the Harley-Davidson Foundation, will look to further connect the company, our brand and our employees to the local community, reinforcing our commitment to our hometown, Milwaukee. We could not be more excited to show you our neighborhood on the near West Side. Before I hand over to Karim to cover LiveWire, I would like to cover our outlook for the rest of the year. As we said earlier in the year, for HDMC, we expect retail units to be flat to up 9%. From an inventory point of view, we believe dealers are appropriately positioned with the riding season getting into swing and we continue to expect that wholesale unit shipments will move together with dealer retail sales on a balanced basis by the end of 2024.
This range would equate to wholesale unit shipments being down between 1% and 10% versus prior year. This would result in HDMC revenue coming in flat to down 9%. We expect HDMC operating income margin of 12.6% to 13.6%. This is flat to down 100 basis points from the 2023 level. Let me mention the specific drivers of this again. Negative operating leverage due to lower wholesale volumes, foreign currency which we expect to be a headwind, mix which we expect to be slightly favorable, pricing which we expect to be slightly down as we eliminated the surcharge and fine-tuned our pricing strategy and lastly, we expect some additional manufacturing costs as we realign factory processes in the initial year of production of the new Street Glide and Road Glide motorcycles.
At HDFS, we expect operating income to be flat to up 5%, reflecting retail and wholesale portfolios and customers settling into the existing macroeconomic backdrop. As you will hear from Karim now, for the full year Livewire is revising its operating loss guidance and now expects an improved operating loss of $105 million to $115 million from previous guidance of an operating loss of $115 million to $125 million. Lastly, I would like to reinforce our commitment to returning excess free cash flow to our shareholders. We plan to continue to optimize our returns through share repurchases and appropriate dividend payments. You can see our commitment to capital returns since 2022 on page 15. Since the beginning of 2022 and through Q1 2024, we've bought back $773 million in shares and paid out $214 million in dividends.
This equates to almost $1 billion in capital return to shareholders since 2022 and a share buyback amounting to 14% of our outstanding shares. We are planning to remain on a similar trajectory to this annualized rate throughout 2024. Thank you and now I'll hand it over to Karim.
Glide: Coming to your screens this summer, the film is scheduled to be released in the United States on June 21. For the 2024 Enthusiast offering, we celebrated both music and motorcycles with the release of the Tobacco Fade Enthusiast Motorcycle Collection, available across three models, the Low Rider ST, the Ultra Limit and the Tri Glide Ultra. Again, we've seen a very positive response from customers to these offerings just in time for the rising season to get well underway. Pillar 3 leading in electric. LiveWire continued to pioneer the EV segment with the launch of the S2 Mulholland all new electric cruiser, the second bike on the S2 platform. The bike has been met with a very positive response in the industry, as Karim will detail shortly.
We're also very pleased that LiveWire has become the market leader for on road EV motorcycles in the U.S. this past quarter. And with the company increasing its focus on vehicle and operational costs, it will also consolidate its operations in Milwaukee at Harley-Davidson's historic headquarter at Juneau Avenue. Turning to Pillar 4 growth beyond bikes. In February, through HDFS, we launched Harley-Davidson Flex Financing. For the first time in our history this innovative loan option provides an alternate way to purchase a Harley-Davidson motorcycle. By combining the benefits of attractive monthly payments, shorter terms and greater flexibility throughout the loan period, the product offers customers the ability to return the motorcycle at the end of the term, ready to replace or upgrade into their next Harley-Davidson purchase.
We are committed to putting customers at the forefront of our products and experiences. H-D Flex does just that, while providing them with another innovative financing option to make Harley-Davidson motorcycle ownership fit the individual budget and lifestyle. Pillar 5 customer experience. We are just under 100 days to go. Our second Annual Homecoming event will be taking place July 25 to 28. And last week we announced the full roster of performance with headliners including the Red Hot Chili Peppers, Jelly Roll and Hardy. Tickets are now on sale and we look forward to coming together with our community of fans, riders and their families to celebrate our brand of moto-culture and music and I hope to see many of you there. And lastly on Pillar 6 inclusive stakeholder management, we are looking forward to formally unveiling the new community park at our Juneau Avenue headquarters on June 24.
The project, which has been pioneered by the Harley-Davidson Foundation, will look to further connect the company, our brand and our employees to the local community, reinforcing our commitment to our hometown, Milwaukee. We could not be more excited to show you our neighborhood on the near West Side. Before I hand over to Karim to cover LiveWire, I would like to cover our outlook for the rest of the year. As we said earlier in the year, for HDMC, we expect retail units to be flat to up 9%. From an inventory point of view, we believe dealers are appropriately positioned with the riding season getting into swing and we continue to expect that wholesale unit shipments will move together with dealer retail sales on a balanced basis by the end of 2024.
This range would equate to wholesale unit shipments being down between 1% and 10% versus prior year. This would result in HDMC revenue coming in flat to down 9%. We expect HDMC operating income margin of 12.6% to 13.6%. This is flat to down 100 basis points from the 2023 level. Let me mention the specific drivers of this again. Negative operating leverage due to lower wholesale volumes, foreign currency which we expect to be a headwind, mix which we expect to be slightly favorable, pricing which we expect to be slightly down as we eliminated the surcharge and fine-tuned our pricing strategy and lastly, we expect some additional manufacturing costs as we realign factory processes in the initial year of production of the new Street Glide and Road Glide motorcycles.
At HDFS, we expect operating income to be flat to up 5%, reflecting retail and wholesale portfolios and customers settling into the existing macroeconomic backdrop. As you will hear from Karim now, for the full year Livewire is revising its operating loss guidance and now expects an improved operating loss of $105 million to $115 million from previous guidance of an operating loss of $115 million to $125 million. Lastly, I would like to reinforce our commitment to returning excess free cash flow to our shareholders. We plan to continue to optimize our returns through share repurchases and appropriate dividend payments. You can see our commitment to capital returns since 2022 on page 15. Since the beginning of 2022 and through Q1 2024, we've bought back $773 million in shares and paid out $214 million in dividends.
This equates to almost $1 billion in capital return to shareholders since 2022 and a share buyback amounting to 14% of our outstanding shares. We are planning to remain on a similar trajectory to this annualized rate throughout 2024. Thank you and now I'll hand it over to Karim.
Karim Donnez: Thank you, Jochen. Good morning everyone. We are happy to report on a successful launch of the S2 Mulholland in both the United States and Canada. This is the second motorcycle built on the LiveWire developed S2 platform following the S2 Del Mar. This brings our lineup to three bikes, expanding the choices available to LiveWire riders. The response from the market has been positive with riders, retailers and media responding to the Mulholland styling and the option to choose a bike with a lower riding position. In the third quarter, Livewire reported sales of 117 units, an 86% increase over the first quarter of 2023. Our retail sales outpaced wholesale as Del Mar made its way into the channel, making, as Johann mentioned, LiveWire the number one on road electric motorcycle in the U.S. In Europe, we began shipping S2 Del Mar to our four priority countries at the end of the quarter, with products now available across our network in the region.
We have similar plans for STACYC with the first bike being shipped to Europe as we speak. While we plan to expand our market leadership, our teams are working on design, engineering and sourcing initiatives to reduce the cost of our product. We are also planning to reduce spend and closely manage cash across the operation to get the most out of our strategic investments. To that effect, we will centralize all of our operations in Juneau Avenue in Milwaukee, including the relocation of LiveWire lab operations from California to enable synergies and efficiency. We will take this opportunity to streamline and revisit the organization's structure to achieve simplicity in everything we do. While we maintain the outlook for the revenue units, we now expect a $10 million improvement in operating loss while continuing to focus the larger portion of expenses on product innovation and market development.
LiveWire is fully committed to the electrification of the sports by building the best product and delivering an unmatched customer experience. Thank you and now I'll hand it over to Jonathan.
Jonathan Root: 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 first quarter of 2024, and subsequently I will go into further detail on each business segment. Consolidated revenue in the first quarter was down 3%, driven HDMC revenue decrease of 5%, which was partially offset by HDFS revenue growth of 12%. Consolidated operating income in the first quarter performed in line with our expectations and was down 29%, driven by a decline of 29% of HDMC, a decline of 8% at HDFS and an operating loss of $29 million in the LiveWire segment. Consolidated operating income margin in the first quarter was 15.2%, representing a 545 basis point decline versus Q1 of 2024.
The lower consolidated margin is largely due to a lower Q1 margin at HDMC, driven by lower volumes, pricing and associated throughput. I plan to go into further detail on each business segment's profit and loss drivers in the next section. First quarter earnings per share was $1.72. In Q1 global retail sales of new motorcycles were flat versus the prior year. In North America Q1 retail sales were up 6%, driven primarily by the redesigned and all new Street Glide and Road Glide Touring motorcycles which were introduced at the end of January. In EMEA, Q1 retail sales declined by 11% due to weakness in Germany and France. Overall, EMEA continues to be adversely impacted by macroeconomic conditions and geopolitical uncertainty, which has led to sluggish economic growth.
In Asia Pacific, Q1 retail sales declined by 12%, driven by weakness primarily in China. This is the third quarter in a row where we have experienced declines in the region after six sequential quarters of solid year-over-year growth in Asia Pacific. In Latin America, Q1 retail sales experienced modest growth in both Mexico and Brazil. Dealer inventory at the end of Q1 was up approximately 26% as compared to the end of Q1 in 2023. We believe current dealer inventory and product availability are in healthy positions overall as we approach the spring 2024 riding season. This is important with the recent launch of new model year 2024 motorcycles, especially with the positive reception to our new Street Glide and Road Glide Touring models. Looking at revenue, HDMC revenue decreased by 5% in Q1.
Focusing on the key drivers for the quarter, 7 points of decline came from decreased wholesale volume at HDMC, largely due to the fact dealers were rebuilding dealer inventory in Q1 2023 after the lows they experienced following the pandemic. Motorcycle shipments in the quarter, while below prior year, were slightly ahead of 2021 and 2022 levels. 3 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. Mix contributed 4 points of growth as we continued to prioritize our most profitable models and markets. And finally, foreign exchange was flat to q1 prior year. In Q1 HDMC gross margin was 31.2%, which compares to 35.8% in the prior year.
The decrease of 450 basis points was driven by lower operating leverage and the revenue factors I just spoke about, as well as continued modest cost inflation of 1% to 2%. The majority of the units shipped in the first quarters of 2024 and 2023 were produced in the preceding fourth quarters in advance of the new model year launch. Production volumes were down 24% in the fourth quarter of 2023 compared to the fourth quarter of 2022, which resulted in a higher fixed cost per unit on motorcycles shipped in Q1 of 2024 compared to Q1 of 2023. The unfavorable impact of lower operating leverage was offset by other productivity savings related primarily to logistics during the quarter. HDMC operating margin came in at 16.2%, which is above our full year expectations and in line with expectations for the quarter.
At Harley-Davidson Financial Services, Q1 revenue increased by $26 million or 12%, driven by higher retail and commercial finance receivables, as well as higher average yields as the portfolio resets over time due to higher base rates which are driving higher interest income. HDFS operating income was $54 million, down $5 million or 8% compared to last year. The Q1 decline was driven by higher borrowing costs, a higher provision for credit losses, and higher operating expenses. These increased costs were partially offset by higher interest income. Total interest expense was up $15 million or 21% 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 Q1 HDFS' annualized retail credit loss ratio was 3.7%, which compares to an annualized retail credit loss ratio of 3.2% in Q1 of 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 first quarter remained flat at 5.4% from Q4 of 2023. Total retail loan originations in Q1 were up 2%, while commercial financing activities were up 22% to $1.5 billion. Total quarter end net financing receivables, including both retail loans and commercial financing was $7.9 billion, which was up 4% versus prior year. For the LiveWire segment, electric motorcycles revenue decreased in the first quarter of 2024 compared to the prior year period despite higher unit sales in the quarter.
The lower revenue was due primarily to product mix and a one-time adjustment relating to a change in their retail partner strategy. Selling, engineering and administrative expenses remained relatively flat compared to the prior year. As expected, basic revenue was down compared to Q1 of 2023, primarily due to a reduction in third party branded distributor volumes. LiveWire operating loss of $29 million was in line with our expectations as Livewire continued to invest in new motorcycle models and action initiatives to reduce EV costs. In addition, SG&A was flat to prior year. Wrapping up with consolidated Harley-Davidson, Inc. full year financial results, we delivered $104 million of operating cash flow in Q1, which was up from $47 million in the prior period.
The increase in operating cash flow was due primarily to lower net cash outflows for wholesale financing and favorable changes in working capital compared to Q1 of 2023. Total cash and cash equivalents ended at $1.5 billion, which was $97 million lower than at the end of Q1 prior year. This consolidated cash number includes $141 million at LiveWire. Additionally, as part of our capital allocation strategy and in line with our commitment to return capital to our shareholders, we bought back 2.5 million shares of our stock at a value of $98 million in Q1 of 2024. As we look to the rest of 2024 we remain excited about our new 2024 motorcycle lineup and as Jochen discussed, we are reaffirming our full year guidance with the exception of the improvement noted in LiveWire operating loss.
I would like to put some unit numbers to our 2024 outlook that Jochen cited earlier, and these are in line with what we said on our last earnings call, which took place in February. At HDMC we expect that retail units sold and wholesale unit shipments will move together on a balanced basis in 2024. We expect 163,000 to 178,000 retail and wholesale units. This results in HDMC revenue coming in flat to down 9% versus prior year. Last, I will touch on a couple of additional items in terms of capital investments and capital allocation. We continue to expect total HDI capital investments in the range of $225 million to $250 million. As we look at capital allocation in 2024, our priorities remain to fund profitable growth of the Hardwire initiatives, which includes the capital expenditures mentioned previously, paying dividends and continuing to execute discretionary share repurchases.
And with that, we will open it up to Q&A.
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