Harley-Davidson, Inc.
Q4 2020 Earnings Call Transcript

Published: 2 Feb 2021

[Operator:]

Ladies and gentlemen, thank you for standing by and welcome to today’s Harley-Davidson 2020 fourth quarter investor analyst conference call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question and answer session. To ask a question during this time, you will simply need to press star then the number one on your telephone keypad. We ask you to keep your questions to one at a time. If you would like to ask another one, please jump back in the queue. If you require any further assistance, please press zero.

[Shannon Burns:]

Good morning everyone. Today we are webcasting the slides for this call. You can also access the slides at investor.harleydavidson.com. 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 our latest earnings release and filings with the SEC. Harley-Davidson disclaims any obligation to update information in this call. Joining me this morning are CEO Jochen Zeitz, CFO Gina Goetter, and our Chief Commercial Officer, Larry Hund will also be joining us for Q&A. Jochen, let’s get started.

[Jochen Zeitz:]

Thank you Shannon. I would like to welcome our shareholders, the financial community, dealers, employees, and all of our valued stakeholders who are joining us today. We’ve extended today’s call in order to first review our 2020 financial results, to then discuss our new strategic plan, the Hardwire. 2020 was an extraordinary year for most companies with outsized challenges not seen before in our lifetime. We rose to those challenges. Our team managed COVID-19 impacts, keeping community wellbeing at the forefront, protecting liquidity and achieving significant cash savings. We also successful overhauled the entire company through the Rewire. As a result, we expect to deliver ongoing gross cash savings of approximately $150 million starting this year. Just to name a few additional results of the Rewire, we streamlined our planned product portfolio by 30%, reset motorcycle model year launch timing closer to the start of the riding season, exited 39 markets with sharpened focus on our highest potential markets, optimized our dealer network, reducing the total network by approximately 160 net dealers, and our approach to supply and inventory management helped tighten dealer inventory by 59%, driving significant increases in key value metrics. We substantially reshaped and improved all aspects of the company, setting us on solid footing to deliver the next phase of our transformation. The entire team pulled together and put forth tremendous effort. We put in place the right leaders, structure, and strategy to perform at a much higher level. Throughout the year, we also made initial progress towards enhancing desirability. I’ll talk more about this later, but for now I will ask Gina to review our financial results for 2020.

[Gina Goetter:]

Thank you Jochen. 2020 was indeed an extraordinary year for Harley-Davidson. We took significant actions to reset the company for future success through our Rewire actions and our pandemic response. Our fourth quarter results reflect the continued execution of our deliberate supply and inventory management approach as well as the impact of our new model year reset from Q3 to Q1 each year. With these strategic shifts, our Q4 revenue and margin were down significantly versus a year ago but exceeded our internal expectations for the quarter. Fourth quarter results were also impacted by $44 million of restructuring costs and brand investments to support the reset in new model year launch timing. Financial services had another strong quarter with operating income of $77 million, which is up 31% driven primarily by a lower provision for credit losses. On a full year basis, total revenue was down 24% driven by the motorcycle unit declines, and we delivered consolidated operating income of $10 million, resulting in full year earnings per share of $0.01. Adjusted earnings per share is $0.77, which excludes the impact of restructuring and tariffs. Rewire restructuring charges totaled $130 million for the full year. As a result of these restructuring actions, we reset our cost structure, effectively lowering our cost base by approximately $115 million. In Q4 and for the full year, global retail sales and market share of new Harley-Davidson motorcycles were down compared to last year, reflecting right retail inventory and a shift in timing of our model year launch. Across the dealer network, retail inventory of new motorcycles was down 64% in the U.S. and 51% internationally. We continue to see the positive impact related to our inventory and supply management efforts. These actions are driving fundamental improvements across our business and are creating value for our dealers and customers through stronger transaction prices for both new and used motorcycles and a successful network of dealers. Motorcycle segment revenue was down 39% in Q4 on a 48% decrease in motorcycle shipments versus 2019 related to the impact of the model year changeover and our supply and inventory management efforts. The impact of motorcycle mix was slightly negative as the increased contribution from touring was offset by the decreased contribution from the cruiser segment. Complementary business performance in the quarter was anchored by a 13% increase in parts and accessories revenue due to strong used motorcycle sales in the quarter. On a full year basis, revenue was down 29% on a year-over-year motorcycle shipment decline of 32%. An unfavorable mix shift of motorcycle models was partially offset by higher pricing and fewer sales incentives, in line with our ongoing approach to supply and inventory management.

[Jochen Zeitz:]

Thank you Gina. Now let’s look forward and talk about our Hardwire five-year strategic plan that will guide Harley-Davidson into the future. It’s been 11 months since we started this journey together as our world was gripped by the pandemic. We’ve successfully completed the Rewire comprehensive playbook across all aspects of our business to drive efficiency, speed and focus that we believe will yield significant results. We’ve also conducted a rigorous strategic review leading to the development of a clear path for the future, the Hardwire. This will be powered by H-D#1, a high performing, winning culture based on 10 clearly defined leadership principles. Our Hardwire strategic plan is rooted in desirability. Our ambition is to enhance our position as the most desirable motorcycle brand in the world. Desirability is a motivating force driven by emotion. Harley-Davidson has long been associated with igniting desirability - it’s in our DNA and it’s embedded in our vision. It is at the heart of our mission and it is part of our 118-year legacy. Done right, Harley-Davidson’s desirability preserves the value of our customers’ purchases, builds our brand beyond our riders, and ensures loyalty and drives engagement. Our strategic ambition for desirability is therefore very simple

[Gina Goetter:]

Thank you Jochen. In line with our commitment to set realistic expectations and target profitable growth, we believe our five-year targets will demonstrate continual progress through 2025 on several critical dimensions, and they are a step change from our recent historical performance. Through 2021 to 2025, the term of the Hardwire, our targets are as follows. For the motorcycle segment, we are targeting mid-single digit annual revenue growth with solid growth expectations in motorcycles, parts and accessories, and general merchandise. We also expect the motorcycle segment operating margin to show steady improvement from 2019, our most recent comparable year, driven by increased efficiencies across our operations and leverage within SG&A as we maintain a lean cost structure. We will continue to invest back into the business and brand and have included the anticipated investments in our updated margin profile. In financial services, we are targeting operating income to grow double digits 2021 through 2025 behind growth in the motorcycle segment and optimization of our digital platform. We expect capital spending to be between $190 million and $250 million each year behind defined Hardwire investments. This includes the capital required to innovate across our core product families. It also includes initial investment supporting the separate EV division as well as capital needed to build out an enhanced digital ecosystem. Finally, we are targeting low double-digit EPS growth 2021 through 2025. As we look at the motorcycle segment operating margin through 2025, we are targeting a steady year-over-year improvement leading to healthier margin levels than our recent past. As I talked about earlier, the negative operating margin in 2020 was primarily driven by the impacts of COVID and the restructuring actions and costs incurred as part of the Rewire. As we look forward, we believe our steady margin growth will be fueled by focus on our most profitable motorcycle categories, optimization across our operations, outsized growth of our complementary businesses, and maintaining a lean SG&A cost structure. The Hardwire will require significant investment, most notably product innovation across combustion and electric, brand investment and enhancement of our digital capabilities, which are reflected in our current margin projections. Turning to cash allocation, we have two priorities moving forward. First, we will fund our Hardwire plan and capital and brand investments that we believe will drive our expected operating income and double-digit EPS growth through 2025. Our second priority is to reward shareholders through dividends, starting with a Q1 cash dividend of $0.15 per share that we announced in our press release this morning. We plan to reserve remaining cash for high return investment opportunities, to accelerate growth and unlock upside within the Hardwire framework. At this time, significant share repurchases are not planned as we prioritize cash for these top two priorities. Our objective is to deliver shareholder returns that are commensurate with our industry and the results of our business while also recognizing that seeding the right investments for future growth will provide long-term value for our shareholders beyond 2025. For the first year of our Hardwire plan execution, we expect to continue to manage through the ongoing uncertainties brought on by COVID and the impact to our revenue and supply chain. Our guidance for 2021 is as follows

[Jochen Zeitz:]

Thanks Gina. Let me summarize. We’re building on desirability and will continue our cultural journey as H-D#1, committed to being a world-class team, leadership and talent that is fully aligned with our unique vision and mission as a company and brand. Our Hardwire plan is built around six strategic priorities

[Operator:]

Your first question comes from James Hardiman from Wedbush Securities. Your line is open.

[James Hardiman:]

Hi, good morning. Lots to digest here, obviously. Really appreciate all of the qualitative color around the new Hardwire plan. I think all of the goals make a lot of sense to the street, but I wanted to dig in, maybe into some of the quantitative aspects of this. You’ve given obviously pretty good guidance for 2021. I do the simple math here and I get basically in the low $2 of earnings range, and then we have the third 2025 guidance which is the low double-digit earnings, which basically gets me into the low to mid $3 range, which is basically what you did in 2019. I’m trying to make sure I understand that essentially the longer term plan is understandably conservative, and I get the idea of maybe under-promising and over-delivering, but it seems like the goal here is basically where we were last year. Tell me where I’m sort of off on some of that math.

[Gina Goetter:]

No, I think that your math is getting into generally the right spot, and what I’d say in terms of where we’ve been historically as a company is setting very high expectations and then not delivering on those, so we wanted to purposely set a baseline that we are committed, we’re confident in delivering, and as Jochen said in his remarks, finding ways to over-deliver on that guidance. But right now, we are planning for how you said it, to get back and slowly build nice growth year after year after year, a sustainable model.

[James Hardiman:]

I got it, and then just maybe a little bit of a clarification, in the Hardwire plan, I forget the wording but it was basically to improve--consistently improve operating margins versus 2019, but then it actually seems like 2021 operating margins are a step back from 2019. Am I thinking about that the right way, or am I maybe mixing GAAP or non-GAAP in some way? I have you guys doing a mid-9% operating margin in 2019 - that’s non-GAAP, versus call it a 5% to 7% for 2021.

[Gina Goetter:]

Got it. Yes, on a GAAP basis, what I would say is that we will be improved versus our 2019 levels, and then slowly building year after year through the course of the Hardwire plan.

[James Hardiman:]

Slowly improving GAAP, so the 5% to 7% is GAAP for both 2019 and 2021 and sort of a go-forward basis?

[Gina Goetter:]

Correct, correct.

[James Hardiman:]

Got it. Excellent, thank you.

[Operator:]

Your next question will come from Shawn Collins from Citigroup. Your line is open.

[Shawn Collins:]

Great. Hi Jochen, Gina and Shannon. Good morning, nice to speak with you.

[Gina Goetter:]

Good morning.

[Jochen Zeitz:]

Hello.

[Shawn Collins:]

Hey guys, I wanted to ask--I know you had your new product launch just, I think, a week and a half ago, and I just wanted to ask what the reaction to that has been so far, if you could talk about that.

[Larry Hund:]

Sure, this is Larry Hund, Shawn. Just a quick comment on--Shawn, this is Larry Hund. Just a quick comment on the ’21 launch. Good response from customers, good response from dealers so far, so we are pleased with that, and then obviously looking forward to the reveal of Pan America here in a couple of weeks.

[Shawn Collins:]

Great, that’s helpful. Thank you for the time and insight.

[Operator:]

Your next question will come from Gerrick Johnson from BMO Capital Markets. Your line is open.

[Gerrick Johnson:]

Good morning, thank you. You’re talking about investing more in core touring and large cruisers, but at the same time you’re going to be compelling new riders to choose Harley. How do you plan to do that without investing in smaller displacement bikes? I understand the Pan America, but are you no longer committed to, say, the sportster segment, and it seems like to get new riders, you’d have to lure them from other brands, which is a little bit more difficult than getting them at the entry level, so if you can discuss more in depth how you plan on bringing new riders into your ecosystem. Thank you.

[Jochen Zeitz:]

Yes, I said in addition to touring and large cruisers, there are other opportunities as part of our 70-20-10 construct, and the 20% includes entering new segments and expanding profitability in existing segments. The new segment would be adventure touring, as an example, and the existing segment would be middleweight cruisers, which would include sportsters. As I also said, I believe, the 10% includes us looking at premium low displacement in markets where we see an opportunity, primarily through partnerships, so all of these segments are critical segments as part of the Hardwire going forward and should enable us to bring new riders into the sport before they enter touring and large cruisers.

[Gerrick Johnson:]

All right, thank you.

[Operator:]

Your next question will come from Craig Kennison from Baird. Your line is open.

[Craig Kennison:]

Hey, good morning. Thanks for taking my question as well. It’s on the certified pre-owned program. What are the economics of that CPO program, and are there any direct revenues for Harley-Davidson or is it just a function of indirect benefits that your brand gets from higher used prices, and then of course dealers benefit from being able to sell bikes in the network?

[Jochen Zeitz:]

There are benefits, direct and indirect, obviously. First of all, the pre-owned program will be professionally inspected, verified mechanically sound, backed by a 12-month limited warranty, and those are exclusively available at participating Harley-Davidson dealerships, so that’s the benefit of the dealers. There is obviously more mark-up included for HDFS - that will enhance our overall customer experience and support, the growth of HDFS as a complementary business, so we see that as a further driver of profitability for HDFS as well. Just a little bit of background, the total of use for Harley-Davidson motorcycles, if you look at the entire ecosystem, is essentially 3 million motorcycles with about a third being seven years or older, so we see that there’s a great opportunity with a focus on a program that will certify bikes that are no older than five years and have no more than 25,000 miles. That is the focus, and those customers we believe have the highest potential to also get them engaged in new motorcycles in the future. It also is a competitive move, because we are the only ones through our dealerships that can actually certify these motorcycles, which should be an additional benefit for our customers to come to Harley-Davidson dealers and come to Harley-Davidson, rather than going to anybody else who might service Harley-Davidson motorcycles.

[Craig Kennison:]

Got it, thank you.

[Operator:]

Your nest question will come from Jaime Katz from Morningstar. Your line is open.

[Jaime Katz:]

Hi, good morning. I’m hoping you can elaborate a little bit on the 2021 revenue growth for motorcycles and whether you can maybe bisect that between volume and price expectations. Thanks.

[Gina Goetter:]

Hi Jaime. At this time, we’re not giving out that guidance, so we’re giving the guidance of 20% to 25% revenue growth off of 2020.

[Jaime Katz:]

Okay, thank you.

[Jochen Zeitz:]

What we can add is in terms of pricing, I think that’s important to note the pricing of our bikes in particular has not really changed to previous years, so we’ve kept more or less our pricing constant. That might help you.

[Jaime Katz:]

Okay. On top of that, can you maybe help us think about when inventory in the dealer channel normalizes? It seems like this has been sort of a multi-year right-sizing, but I’m not sure if that is something that will persist through 2021 and then we’ll get sort of to where we want to be, to optimally fill the channel, or if there’s something else you guys are thinking. Thank you.

[Larry Hund:]

Jaime, this is Larry. Just a couple of comments on dealer inventory. I’d say our approach to dealer inventory and supply management really isn’t a short term or temporary measure. It really is a fundamental change in how we’re doing business going forward. It’s a key action to make sure our motorcycles are the most desirable in the world, and we focused in 2020 on initiatives and products that drive value and create that desirability. We essentially eliminated promotions and discounting while we focused on strengthening the brand, so we are very pleased with the results of the actions we’ve taken and we intend to continue to manage inventories tightly and continue to drive that desirability.

[Operator:]

Your next question will come from Greg Badishkanian from Wolfe Research. Your line is open.

[Fred Wightman:]

Hey guys, good morning. It’s actually Fred Wightman on for Greg. If we just look at the top line guidance that you guys gave for the ’21 - ’25 period, can you talk about what you think that gets you to in terms of market share? Is the way to think about it that you’ll probably get back to 2019, early 2020 market share figures by the end of that ’25 period, or should we be thinking about it differently?

[Gina Goetter:]

So we--when we think about--

[Larry Hund:]

You know--go ahead, Gina.

[Gina Goetter:]

No, go ahead, Larry. Go ahead.

[Larry Hund:]

I was going to say that we are really not--you know, we obviously focus on market share, but most importantly we are focused on building desirability for the brand and continuing to be the most desirable motorcycle brand in the world. As I said, the actions we took this past year, we have seen--you know, obviously we are not spending on promotional activity, we’re spending on brand building. We’ve seen increases in motorcycle pricing at retail close to MSRP, we have seen increases in used motorcycle pricing, both at wholesale and retail. We have seen the gap close between new and late model used motorcycles fairly significantly to the tightest level it’s been in years, so we obviously look at market share and care about market share but we are primarily focused on building desirability for the brand and providing that great customer experience.

[Jochen Zeitz:]

Commenting on market share is also not really great because we don’t know if the market will increase, will it decline, will it stay stable, so that’s also impacting obviously how market share develops. From that point of view, our focus is on a profitable and desirable top line, and whatever market share that gives us, so be it. We focus on our internal metrics and not really on market share, but as Larry said, obviously we are looking at market share for sure and we’ve reset the button through--the market share button by being much more considerate about how we market our products around the world, in terms of not promoting our brand and making sure that we are keeping the values of our bikes high and our other products as well.

[Fred Wightman:]

Great, thanks.

[Operator:]

Your next question will come from Joseph Spak from RBC Capital Markets. Your line is open.

[Joseph Spak:]

Thank you very much. Gina, it might be helpful for everyone on the call if you could talk about the total investment dollars expected over the planning period. The real question is your retail obviously suffered this year, and I know part of that was because you were destocking; but if you think about that, especially considering many other power sports here did quite well this year and there was some concern that maybe demand was pulled forward, I’m wondering if you think you actually missed out, because if it’s true that industry demand was pulled forward or maybe discretionary dollars that would have gone to Harley-Davidson product may have gone elsewhere, to other manufacturers or to other activities, then it would seem like it makes your job a little bit more difficult over the coming years. I’m wondering if you can just give a little bit of retrospective as to what you think happened this year.

[Jochen Zeitz:]

Sure, good question. I don’t think we’ve missed out on anything, really, and in fact if you look at overall profitability of the dealer network, which is an important gauge of success as well, that has been up significantly over previous years, and that’s important. We need a healthy and profitable dealer network, and obviously the reset of the new model year was also strategically the right thing to do but it was also a necessity, because through the pandemic we would not have been able to bring some of those products to market, so it was the logical thing to do, and of course strategically the right thing to do because it’s aligning the new model year with the riding season. We don’t believe that we have missed out, but what has happened is we’ve been able through the increased demand to overall reduce our inventory levels dramatically. We were able to flush out some of the models that were pushed into the market that in previous years would have been discounted - that’s gone, and our overall MSRP that we achieved was close to our retail pricing. Used bike prices have been going up, so what has helped in this pandemic is essentially the increased demand was able to flush out some of the wrongs of the past and set us up for a successful future. We believe we have a strong desirability with our product, with our brand, with our dealers, and from there we will build and grow our business profitably.

[Gina Goetter:]

In terms of your question on investment over the life of the Hardwire, the guidance that we’re giving is capital investment of $190 million to $250 million a year, so throughout those five years there may be some years that are $190 million, there will be some that could be a little bit north of that. The primary investments are going against the core of our business, the most profitable segments of our business, initial investments in our EV platform, as well as the digital ecosystem.

[Joseph Spak:]

So that’s all capex, there’s no opex investment associated with it?

[Gina Goetter:]

That is embedded. There is opex. There is additional brand and marketing investment that’s embedded in the op margin guidance that we gave.

[Joseph Spak:]

And is there any framework around that?

[Gina Goetter:]

No, we’re not providing direct guidance on that.

[Joseph Spak:]

Okay, thank you.

[Operator:]

Your next question will come from Joe Altobello from Raymond James. Your line is open.

[Joe Altobello:]

Thanks. Hey guys, good morning. Just wanted to clarify a couple of things. I guess first, in terms of your mid-single digit revenue growth target, is there an industry growth assumption that’s baked into that or is it completely independent of industry growth over the next five years?

[Jochen Zeitz:]

It’s independent of industry growth in the next years. It’s what we feel comfortable based on our internal evaluation and not really looking at the market and what we expect the market to be. We feel comfortable with that guidance, no matter what happens. Obviously if the world enters into a massive recession, that’s a different story; but seeing what we’re seeing now, we believe that we’re fine with our estimates.

[Joe Altobello:]

Okay, got it. Just wanted to go back to Jaime’s question. Do you see the opportunity to begin rebuilding dealer inventories in ’21, or do you anticipate keeping retail and wholesale fairly consistent this year?

[Larry Hund:]

I would say just what we said earlier, which is we are going to continue to manage inventory in line with demand, and we are going to watch that very closely. Inventory was a little bit tight at the end of last year, but overall I think we feel good about the way we managed inventory throughout the second half of the year, so I think our approach is going to continue to be fairly consistent with that.

[Jochen Zeitz:]

But where we feel that inventory has gone low, in particular in the fourth quarter through an over-achievement in retail sales, certainly we will adjust that as needed around the world, but not overall as a company. There are some pockets where we’ve gone short because our sales went above expectations in the fourth quarter, in particular in those particular pockets, and that we will certainly replenish.

[Joe Altobello:]

So it’s a selective rebuild, not a total rebuild.

[Jochen Zeitz:]

Correct.

[Joe Altobello:]

Okay, got it. Thank you.

[Operator:]

Your next question will come from David MacGregor from Longbow Research. Your line is open.

[David MacGregor:]

Yes, good morning everyone. Just wanted to ask about the electric bike business. You noted you’ll establish a dedicated division for electric bikes with a focus on technology development, but can you discuss some of the specific goals in terms of timeline or number of models or price points for this division? I guess I’m just trying to get a sense of what your vision is for the electric bike business over the next few years, and how much time do you think you’ll need to begin delivering a relatively steady cadence of new products to the market? Also, you mentioned having dashboards, performance dashboards. What are your dashboard metrics for progress on electric bikes? Thank you.

[Jochen Zeitz:]

Yes, as I said, we are fully committed to electric and we will be revealing more of our electric strategy later in the year, so I’ll have to unfortunately ask you to have a little bit of patience about that. Everything else, what I said is important because setting up a separate division, I think is a significant move for the company because it just gives the autonomy and the flexibility to invest in the opportunities, and considering that it is a very different business model that you need to apply to electric than combustion. When you talk about model year, it’s not really something that in the electric universe, you would be talking about. You don’t talk about a model year, you talk about technology - do you have a new technology, a new technological application that you offer in new product, and you’re not really aging your product line by model year, so that’s one change that we will certainly make, not talk about a model year. That’s one of the reasons why we’ve also not launched a new product in the electric space right now. The focus was on our core categories, combustion categories, then the focus in on our adventure touring as we launch into a new segment, plus one product that also addresses the middleweight, and then later we will talk about electric. But as I said, you shouldn’t be expecting electric to automatically be launched at the same time as we launch other products, because they are distinctly different in terms of the customer, in terms of how we go to market and how we market those products. In terms of the dashboard, it’s really an internal dashboard that goes across the entire organization. It has overall brand desirability metrics, it has metrics for each function and how we operate as a company, and that obviously also includes electric. We are not planning to publish what our metrics are, but I mentioned in my speech that obviously the gap between used bike prices and new bikes, MSRP versus retail are metrics that are of course something we’re looking at. We are certainly also looking at market share, but based on a very different look than what we’ve had in the past. It’s a very differentiated dashboard that will allow to manage the entire company, all our profit centers, all our segments, all our functions, and align them with the overall goal of the company that we have established, and that is also how we incentivize our team accordingly.

[David MacGregor:]

Okay, thanks Jochen.

[Operator:]

Your next question will come from Ryan Sundby with William Blair. Your line is open.

[Ryan Sundby:]

Yes, hi. Good morning everyone and thanks for taking my question. Previously I think you talked about concentrating on the 50 highest potential markets, and then in the release today I think you talked more about focusing on the top 10 markets. Just wondering if you can maybe talk about what this focus involves for a focus market versus a non-focus market, why 10 is the right number, and then what this means to the markets that are outside of the top 10. Thanks.

[Jochen Zeitz:]

Yes, good question. We exited 39 markets last year. The 50 markets is still intact - obviously we are operating in 50 markets, but out of the 50 we have top 10 markets that require or that we would like to focus on even further by localizing our approach and go-to-market. You can’t do that for every market. Overall our Harley-Davidson universe is 50 markets overall. Out of those 10, our priority markets that get special attention in terms of strategic planning, in terms of how we go to market, in terms of our Hardwire execution, they might get differentiated product where feasible. All of these special adjustments, thinking global, acting local will apply to those priority markets. That doesn’t mean we are just working on those 10, but they get specific emphasis and focus from senior management, and most of these markets actually also have now new leadership in place, so special focus in every respect.

[Ryan Sundby:]

Thanks.

[Operator:]

Your next question will come from Billy Kovanis from Morgan Stanley. Your line is open.

[Billy Kovanis:]

Thank you for the detail on the call. I just wanted to ask about your priority as a management team in the medium term. Is it growth or profitability? If it’s both, can you provide some color of whether there is a path to get back to 10% motorcycle EBIT margins and if there’s a path to get back to 2018 levels, when motorcycle revenues were around $5 billion? Thank you.

[Gina Goetter:]

I think you hit the right two words, were after profitable growth, sustained profitable growth over the course of the Hardwire plan. We know where we’ve been in our recent history, we will be building our way back to that both in terms of the top line as well as our overall margin structure.

[Jochen Zeitz:]

And we will certainly, as I said, focus on unlocking potential beyond our financial projections as we deliver on our goals, and that’s clear, so we want to commit to what we can deliver and then the focus is certainly going beyond what our targets are for the time being. Five years is a long time as well, and if you look at the past five years, we’ve never hit our numbers and we’ve underperformed and over-committed every single time, and that’s got to stop. We feel confident that no matter what, we will achieve, and that’s great progress, and from there on it’s unlocking further potential.

[Billy Kovanis:]

Got it, thank you. Understand the need to sort of reset expectations. Appreciate it.

[Operator:]

Your next question will come from Gerrick Johnson from BMO Capital Markets. Your line is open.

[Gerrick Johnson:]

Hey, thanks for the second question here. I was curious about investments in updating the dealer network - it’s probably your biggest asset, but maybe a little bit out of date. Your network is mostly exclusive to Harley only. Will it continue to be so, or will you grant exclusions to dealers to have something else to sell in the wintertime? Thank you.

[Jochen Zeitz:]

Well, we want to maintain an exclusive network. We believe that there is enough opportunity for our Harley-Davidson dealers to exclusively sell, so that exclusivity should and will be a focus of our future Hardwire plan and making sure that our dealers have a profitable future. They have had that in the past and they should continue even more so in the future. Like everything, everything needs upgrade. I talked a lot about an omnichannel strategy, about digital experience. It’s not just about selling, it’s about carrying the experience that we want to provide as a brand into our dealerships, so the future of retail is certainly something that we are looking at jointly with our dealers to make sure that they are, over time, adjusting to the requirements of the marketplace. Updates will happen on a short and a long-term basis, but there is not really much to talk about other than the strategic direction that is pretty clear, that we have to have a fully integrated, cohesive experience digital and physical network that then drives purchases along the entire journey and the ecosystem of our customer.

[Gerrick Johnson:]

Okay, and can I ask about the mid-single digit revenue growth for the motorcycle segment? What’s the base there - 2021 you’re building off of, or is that off of 2020 or 2019?

[Gina Goetter:]

For the Hardwire, we’re talking about 2021 through 2025 is mid-single digit revenue growth, and then we gave you for ’21 guidance that that revenue growth versus ’20 is going to be up 20% to 25%.

[Gerrick Johnson:]

Right, so then are we building off of that, mid-single digits off of that number--

[Gina Goetter:]

Correct, yes.

[Gerrick Johnson:]

Okay.

[Gina Goetter:]

Yes, yes.

[Gerrick Johnson:]

Okay, great. Thanks.

[Operator:]

Your next question is from James Hardiman from Wedbush Securities. Your line is open.

[James Hardiman:]

Hey, a couple follow-ups from me. You’ve said it, I think here today, and I think every dealer that we talk to has echoed the notion that retail is very much being held back by a lack of inventory. Two questions, and I apologize if somebody else has asked this - I had to drop off for a minute there, but two questions here. January, as shipments into the channel picked up with some of the model year ’21, did you see any improvement in retail in January versus the declines that we saw in the fourth quarter? Then secondly, I guess from what I’ve heard, it doesn’t look like you’re looking to significantly build inventory over the course of the full year, so to the extent that retail would have been better in ’20 with more inventory, are we still in that position in ’21 where a disproportionate number of the benefits will maybe be seen in the used channel, but we’re not going to see the full brunt of the demand benefits in 2021 due to--and I guess that’s assuming that inventories don’t pick up meaningfully for the full year. How do I think about that?

[Larry Hund:]

A couple things. January, I won’t comment specifically on January sales, I’ll just say we are pleased with both dealer and customer response to our new 2021 models so far. They’ve only been in the market a few weeks, but we feel pretty good about that. The second thing regarding inventory, as Jochen said earlier, we’re going to continue to manage inventory tight, we are going to focus on building desirability and all the benefits that have come with that over the second half of 2020. We do have a couple markets that due to stronger than expected sales in the fourth quarter--you know, some parts of Europe, for example, where we were, I’ll call it below our inventory strategy, and we will look to re-fill some of those markets as we go through this year to make sure we properly supply them, but absolutely do not want to over-supply any markets, similar to what we did this year.

[Gina Goetter:]

James, one additional piece of color I’d give you on inventory as you think about our build and depletes, where we exited the year, we will see a build in the front half of the year as we fill back the pipeline, get ready for riding season, and then the inventory comes back down in the back half of the year. To your point on missing demand, we will have the bikes at our dealers to meet that demand.

[James Hardiman:]

Okay. I’m avoiding asking the question about retail because I know you don’t want to give guidance on retail, but obviously 2020 retail was down a lot but demand was not, so I’m trying to figure out how do I think about 2021 retail and what’s embedded in the guide there.

[Larry Hund:]

2021 retail, we think is going to continue to--you know, we think there are some positive trends in the market that we saw last year, and we think some of that is going to continue into 2021. Certainly if you take a look at our combined new and used sales in the second half of the year, they were positive, and that trend continued in the fourth quarter, so we feel good about that. As Gina said, we feel good about our ability to supply the market going into 2021 and have bikes available in the first half of the year, and obviously we’ve done a lot of shipments of new motorcycles, particularly in the U.S., since those new models were introduced, so I would say that we feel pretty good about retail as we go into 2021 and our ability to supply.

[Jochen Zeitz:]

I think to add to this, if you look at our used bikes, obviously they’ve now just gotten a year older and they have not been supplemented by a flood of products that were new last year, because that’s what we’ve done in the past - we delivered excess product into the market that then become part of the used inventory that was not built on actual demand, but was pushed into the market based on the push model that we referred to. That’s just not a healthy thing to do. That has been corrected last year, and we believe that that’s a good indicator. When you look at the used bike prices as well having gone up dramatically and the MSRP gone up, and the gap has been closed dramatically, that bodes well for the future, and we’ve corrected the wrongs of the past and setting ourselves up for a more desirable and demand versus supply-driven business model.

[James Hardiman:]

Got it. Thanks everybody.

[Operator:]

Your next question will come from Shawn Collins from Citigroup. Your line is open.

[Shawn Collins:]

Great, thanks Jochen, Gina and Shannon again. Thanks for taking my second question. I wanted to ask about electric - I know it’s a big priority of the new strategy. Jochen, I know you have been involved in Livewire at Harley-Davidson since day one. Can you offer some commentary not on your strategy, which I know is still evolving, but instead can you possibly comment on the potential of electric in the motorcycle space as a whole? In autos, electric is virtually turning the auto industry upside down. Is it possible that electric turns the motorcycle industry upside down, or any thoughts on that industry as whole might be helpful. Thank you.

[Jochen Zeitz:]

Thank you Shawn. First of all, I would like to reiterate what I said last year in one of our quarterly calls - Livewire is an absolutely extraordinary product. It’s the best product out there. It’s performing extremely well and I couldn’t have asked for a better electric experience coming from the company. That’s very important. Our foray into electric is working very well in terms of having a fantastic bike, that those who own it are very pleased about it, and that’s a starting point. In terms of the industry, I think you need to differentiate between segments. When you look at the core segments of Harley-Davidson, it will take a lot longer for electric to arrive simply because the technology that is required, in particular in the touring segment, is not there yet simply because bikes have less space for battery packs, and range for touring is very important, so if you’ve less space and need high range, that will take time. The electrification in the motorcycle segment will happen much faster in what I’d call the mobility segment, when you talk about urban centers around the world where a motorcycle essentially becomes a mobility product to get around town. That’s where technology and range and customer expectations meet quicker and where we will see electrification happening much faster. When you think about products that are core to Harley-Davidson, that will take a longer time. Having said that, it’s absolutely critical for us to invest into electric now and having a differentiated approach exactly based on what I said - you know, setting it up as a separate division in order to cater to the opportunities that exist today to prepare ourselves for the long term future for Harley-Davidson, and that’s essentially what we’re doing.

[Shawn Collins:]

Great, that is helpful. Thank you.

[Operator:]

Your next question will come from David MacGregor from Longbow Research. Your line is open.

[David MacGregor:]

Yes, thanks for the follow-up. I just wanted to ask about HDFS. You’d indicated that your plans were to expand HDFS globally. Does global mean tracking the 10 geographic markets that you’ve identified for motorcycles, and if it doesn’t and you’re sort of thinking more in terms of those 50 markets overall, I guess the question would be what gives you confidence that you can scale HDFS with an accompanying presence in bikes and not sustain an increase in underperforming loans?

[Jochen Zeitz:]

Yes, I mean, we will always be very focused on making sure that we have a healthy credit portfolio - that goes without saying, and expanding doesn’t always mean doing it yourself. It might be looking into partnerships with others as well, and it’s certain our 70-20-10 will apply also when it comes to the markets that we will be focusing in, looking very carefully at risk-reward opportunities, so align HDFS with our overall company priorities, and that’s where we will be focusing in the beginning.

[David MacGregor:]

Thank you.

[Operator:]

That brings us to the end of today’s Q&A session. I would now turn the call back over to Shannon Burns for closing remarks.

[Shannon Burns:]

Okay, I want to thank everyone for joining us here today, and please remember to join us for the reveal of our all-new Pan America adventure touring motorcycle on February 22. See you then.

[Operator:]

Thank you everyone. This will conclude today’s conference call. You may now disconnect.