Harley-Davidson, Inc.

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.

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 Harvey 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 findings with the SEC. With that, joining me this morning for the first part of the call are Harley-Davidson Chief Executive Officer, Jochen Weitz, also Chief Financial Officer, Gina Genner, 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, Adele O'Sullivan, and we will also have Harley-Davidson seeming to be interim chief financial officer, David Viney. With that, let me turn it over to our CEO, Jochen Zeitz. Jochen?

Thank you, Sean, and good morning, everyone. Thank you for joining us today for our Q1 2023 results. Ali Davidson delivered a solid start to 23, the third year of our hardware strategic plan, with consolidated first quarter revenue up 20% to $1.789 billion driven by HDMC. We're pleased with our start of 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, from prioritizing unit growth at all costs to a 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 on 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 fares are aligned to healthy demand generation, especially in the current consumer environment. The programs we have designed and are implementing share four goals. generate demand and traffic toward dealerships and digital properties, provide tools and options to address concerns around affordability, ensure proper management of inventory and its lifecycle, 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 bite for them. Our season opener on March 25th, 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 one, profit focus. With the Hardwire, we made a commitment to strengthen and grow Harley's leadership in our strongest motorcycle 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 have a 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 CBO Road Glide Limited Anniversary model and six 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, a new NYTSA Special Middleweight Sport motorcycle, and a restarted 3-wheeler 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 phase-out 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 launch is a new vector for growth in select markets for a new customer, and we're 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 and 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, a grouping of lifestyle apparel lines defined by the heritage and craftsmanship 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 and 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 through our 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 three of our hardware strategy and are excited for what lies ahead for our company and brand. We remain committed to our strategic focus on innovation and profitability and a 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 ElectroGlide, a spark that would ignite a new generation of Harley-Davidson motorcycles that would define the grand American touring category and the lineage of motorcycles cherished by generations of riders that followed. The legacy lives on today, with two of Harley-Davidson's most iconic motorcycles in history, the Street Glide and Road Glide, whose DNA can be clearly traced back to the 1969 Electric Glide. Over the decades, Harley-Davidson designers and engineers have thoughtfully evolved 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 aspirational of these models have been forged from Harley-Davidson's customer vehicle operations, CVO, a collection of limited production motorcycles that deliver the ultimate in refinement of styling, design, craftsmanship, and attention to detail, along with top-of-the-line performance. With the introduction of the all-new CVO Streetlight and CVO Roadlight, we've completely re-imagined 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 era 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 Livewire, to provide an update on the quarter at Livewire. Ryan.

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 to Del Mar into production. Our launch event 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 Guru team, we've 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 edition for Europe. Overall, we are very pleased with 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 product to market and maximizing conversion of the reservations we've collected in denouncing the Del Mar in the U.S. last year. And now I'll hand it over to Gina Getter to talk through the financial performance of Harley-Davidson and Livewire in greater detail. Gina?

Thank you, and good morning, everyone. Q1 2023 is the second full quarter under our new reporting structure with the three segments of HDMC, HDFS, and Livewire. Despite the decline in retails, the financial performance finished ahead of expectations. Pricing action, 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, off higher finance receivables. And the library 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, live wire operating loss of $25 million included a step up in product development investment behind the launch of the Del Mar product, an increased operating expense associated with standing up a 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 roll-ups for 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. AMIA 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 two percentage points of MSRP. Looking at revenue, total HDMC revenue increased 21% in Q1, focusing on the key drivers for the quarter. Twelve points of growth came from volume driven by wholesale unit growth. Eight 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 three points of growth as we continue to prioritize our most profitable models and markets. And finally, two 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. HCMC 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's 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 and net financing receivables, including both retail loans and dealer inventory financing, was $7.6 billion, which is 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 market, and at the end of the quarter, cash and committed banking time at 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 live wire segment, first quarter revenue decreased by 25% from $10 million to $8 million, with the majority of 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 a 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 two points of unit growth, one to two points of mix as we continue to focus on our profitable core business, and one to two 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 hardware 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 get deeper into core writing season to assess the impact of loss rates for the year. There's no change to our live wire segment guidance. We continue to expect unit sales between 750 and 2,000 units and an operating loss range of $115 to $125 million. This forecast incorporates the updated launch timing and the new Del Mar products. And lastly, for total HDI, we continue to expect capital investments of $225 to $250 million as we continue to invest behind product development and capability enhancements. Through the first quarter, we have seen cost inflation generally in line with our expectation and continue to expect in aggregate about two to three points of inflation compared to 4% in 2022. Labor and warehousing costs continue to be the primary drivers of inflation, with deflation and moderation expected within logistics, freight, and raw materials. We've 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 hardware initiative, 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.

Thank you. As a reminder, to ask a question, please press star, then the number one on your telephone keypad. To withdraw your question, please press star one again. We also ask you to limit yourself to one question and return to the queue for additional questions. Thank you. And your first question comes from the line of Robbie Owens of Bank of America.

Oh, hey, good morning. Thanks for taking my – I'll try and make this one question and, you know, obey the rules here. I think my question is on the sort of the shipments in first quarter and maybe help us understand for the – in North America for the dealer network, Was there a pull forward of shipments into the first quarter, the 45K dealer unit inventory levels that you ended the quarter at? Is that in the range that you want the dealers to be in? And maybe help us think about how you think riding season will play out and how we should think about dealer inventory levels as we move through this year. And I think you mentioned the customer mindset. in the current macro environment, you know, maybe changing, maybe just help us understand how we should just think about how the year, and I know everything is constantly changing, but how it looks like it could play out right now.

Robbie, you always do a fabulous job of asking three questions in one question. That's quite remarkable. I love it. But I'm going to turn that over to Adele to take that first part. I'm just joking with you.

Good morning, Robbie. Thank you for the question. So, with regards to where we see the inventory position as we ended quarter one, we are in a much healthier position than we were last year than we have been for a couple of years, quite frankly, as we enter the height of the riding season. We feel comfortable that we have the right levels to support the riding season in the all critical Q2 and Q3 while remaining below what we think were damaging levels of inventory in prior years, you know, 2019 and before that. We tracked this very closely, as you can imagine, in terms of both the family, the mix, but most importantly, the metric around MSRP realization. And as was noted in the prepared comments, this remains within the band that we consider desirable of plus minus 2%. So, we think we are set up properly for the bulk of the season as it comes in Q2 and Q3. Now, with regards to your question on the overall sentiment of the consumer and what we're seeing in retail dynamics, I mean, it is obviously clear in an environment of rising rates and inflation that there is some moderation in customer behavior. And I think we saw that also in Q1 since it was also very early in the writing season. However, overall, we continue to emphasize a message around affordability, focusing on monthly rates. We continue to drive traffic into the dealerships where we think we have the best chance of allowing our dealers to work with each individual consumer on finding the right bike for them. And we continue to emphasize the right tools for our channel partners as well as for HDFS to allow each individual consumer to find the bike that is best suited for them. So, we think with all of these pieces in place, we have the right tools to support the riding season and to maintain that flat to slightly positive retail outlook for the year.

Thank you.

Your next question comes from the line of Craig Kinison with Beard.

Hey, good morning. Thanks for taking my question. Keena, I got a going away gift for you, which is a math question. Love it. Okay. I'm looking at your slide 17, and it's very helpful in that you assume like 23,000 fewer wholesale unit shipments. versus 2019. I think we can run math on that. And that would imply shipments near 190,000 bikes. But you also made a comment about wholesale shipments being up year over year, which will apply more than that. I know it's not a huge gap, but I'm just trying to really fine tune what your wholesale shipment expectation is for the year.

What we've said is that's embedded in our guidance of that revenue growth of four to 7% is roughly call it one to two points of wholesale unit growth. So take where we landed there in 22 and one to 2%. Ahead.

And then just follow up on that then. To what extent, I got to believe retail came in a little lighter than you expected in Q1. How are you able to hang on to kind of your shipment guidance given what looks like a softer start to the year?

Yeah, I think that we feel pretty good with what we're seeing for Q2 and Q3. Remember, as we talked about our retail cadence last quarter, we said Q1 and Q4 were going to be down versus a year ago, and Q2 and Q3 were going to be positive. And as we look at some of the factors that are influencing our Q2 and Q3, so the rollout of our new products, the CVO that was just announced yesterday, the anniversary event that we have coming up, Plus, you know, keep in mind that we had the production suspension last year during Q2 and Q3. We feel pretty confident that, you know, that growth that we're expecting in Q2 and Q3 will come.

Great. Good luck, Gina.

Thanks.

Your next question comes from the line of Joseph Alcibello with Raymond James.

Thanks. Hey, guys. Good morning. I guess first question just to follow up on Craig. Maybe kind of give us what you're seeing so far in terms of retail in April. Obviously, you have easy compares, I guess, in May and June. But I'm curious what you're seeing so far in Q2.

Yeah, thanks, Joseph. Jochen here. We've certainly seen an improvement in April, but today's call is really about the first quarter. But, yeah, as I said, we're happy with the improvement we've seen so far as we are now starting to really get into the writing season.

Okay. And just to follow up on an earlier question regarding, you know, inventory, obviously you're in a much better position than you were, you know, call it four years ago. And I think I asked this question on the last call, but you guys expect some modest pipeline fill this year. I don't know how you define modest, but is it, call it three to 5,000 bikes that you expect to end the year higher versus 22?

Hey, Joe. I'm not going to give you an exact number, but I think the sentiment is correct. So as we think about coming into this year, this is the first year that we felt like we were finally getting back to healthier levels of inventory. Healthier, not the healthiest, but healthier. So we feel like as we exit this year, exit 23, we still have some room to fill a bit.

And what we have to bear in mind if we consider the end of the year, that we are obviously prepping up for 24, and that decision we will make later in the year of how many bikes we're going to pre-produce in order to be ready with the 24 riding season or with 24 as a calendar year. So bear that in mind as well.

Okay. Thank you.

Your next question comes from the line of James Hardiman with Citigroup.

Hey, good morning. So maybe just a couple points of clarification around retail. Jochen, I think you said you saw an improvement in April. Is that an improvement versus, you know, substantial declines in the third quarter or was April actually up? And maybe you can help us with sort of the writing academy channel fill that I think was in the retail number. Basically, what I'm just trying to figure out, I think you guys are still targeting retail growth for the year. I'm assuming that presumes a big growth number for the second quarter. Maybe just help us dimensionalize that.

Yeah, look, April is not even over yet. We still have a week to go. So other than what I just said, I'd rather not provide any additional color to it. But as I said, certainly we've seen an improvement in April. Riding Academy are pretty small numbers, so in the overall retail figure, they don't really have a significant impact. But as Gina said, You know, if you look at the comms, if you look at, you know, the weight of the riding season in Q2 and Q3, bearing in mind that we had this production shutdown and we had, you know, limited bikes available in retail, we feel confident that, you know, the guidance of flat to slightly up is achievable. And that is all based on a measured outlook on the wider economic picture, as I've highlighted earlier.

And to be clear, the flat to slightly up is both. wholesale, which I think you said you're going to get a couple points for, but also retail ultimately.

Well, that comment is primarily referring to retail, but yes, if you do the math, that would indicate that that applies to wholesale too.

Got it. Perfect. Thank you.

Your next question comes from the line of Garrett Johnson with BMO Capital Markets.

Hey, good morning. can you please discuss the strategy behind the new release cadence rather than dropping all the CBOs and anniversary models at once? You know, you released one CBO model and have a couple more coming in June. How about the rest and why the change in strategy?

Yes, thank you very much for the question. Let me just maybe characterize the Q1 component, and then I'll turn it back over to Jochen to give you the sense for the overall strategy. So, we took a very deliberate decision at the start of this model year to release our anniversary bikes in a different cadence than historically in previous anniversary years. We want to maintain that level of excitement throughout the year. We think it's really important that we also have a lot of excitement around our anniversary event in Milwaukee this summer. So we have staggered the launch of the products throughout the year to make sure that we have a little bit of excitement and traffic building activities in the dealership related to that anniversary delivery throughout the year. So certainly a different cadence, but we think one that will support traffic and will support excitement throughout the bulk of the lighting season. And then the same thing I think will go for our CDOs. It was a significant impact as we talk about retail trends in Q1. It was a significant impact as we compared to prior years. But it allowed us, I think, to have an extraordinary reveal or initial reveal tease yesterday that will continue throughout the year. And maybe I'll turn it back to you, Jochen, to talk a little bit more about the CBL launch.

Yeah, I mean, not much to add. Thanks, Adele. This is, you know, we are timing our bikes based on what we feel is creating stipend throughout the year, obviously primarily targeted towards the first half of the year, and then The necessity is also based on when the bikes are ready to be manufactured and fully engineered and ready to go. So that obviously also plays into the launch. But overall, we think the timing is good timing for us and we wanted to keep big excitement and grow the excitement through the riding season, which we certainly will be accomplishing based on the initial feedback we've received on the launch video of the new CVO.

Okay. That sounds great. Thank you. And there's a new motorcycle segment called Lightweight. So, what models are in that?

In our Lightweight segment. Go ahead, Adele.

That includes our HD 350 and 500 launch in China, as well as in North America. It accounts for the Riding Academy bikes.

Great. Thank you very much.

Your next question comes from the line of Noah Zatkin with KeyBank Capital Markets.

Hi. Thanks for taking my question. Just on the credit loss rate, 3.2% in the first quarter, could you kind of help us understand what normal seasonality looks like from a loss rate percentage? And then just how you're thinking about the guide relative to that rate, you know, as you progress through the year? How should we think about, you know, kind of that rate as it relates to a potential need to adjust the guidance? Thank you.

Good morning, Noah. This is David. So, first of all, I think it's important to understand that the realized credit losses in Q1 were about the same as they were in Q4. So, we had 52 million of realized credit losses in Q4, about 52.6 in Q1. So, there was a very similar dollar amount. but a slightly higher percentage because the receivables balance had dropped a little. The other thing that's important to understand is that the HDFS loan portfolio exhibits much greater seasonality than a typical auto loan portfolio. So what we tend to see, because of the riding season, we tend to see people pay on time through the riding season, and then we start to see delinquencies peak late in the riding season into Q4. that ultimately manifest themselves in credit losses in Q1. We've certainly seen that over the past couple of quarters. It's also important to understand what was the driver of that increased loss. Delinquencies are not particularly elevated. They're really in the range that we've seen over the last 10 years or so. What we're starting to see, though, is that there's a subset of borrowers who are defaulting, and then when they default, there's been a really a weaker repossession industry. And there was some declines in retail bike values last year as well. So as you start to see losses or defaults coming through, a lot of people left the repossession industry during COVID. And so because of the repossession industry being weaker, those lower residual values on bikes, that has ultimately led to a higher severity of credit loss as opposed to the losses that we've seen previously. Where we think about the rest of the year, first of all, I mentioned the seasonality. So we would expect that loss rate to reduce through Q2 and Q3. So that would lead, by definition, would lead to a lower loss rate for the year. But as Gina mentioned in the prepared remarks, a number of things that we've been working on, we've been improving our origination strategy. We've been improving the scorecard cutoffs and reducing loan-to-value ratios We've improved our servicing activities, so we've put accelerated calling efforts in place. We're using texting in late-stage delinquencies, and also making a lot of enhancements to our repossession strategy to improve the severity of loss. So all of that combined leads us to what we think will be a lower annual rate for the year And that's why we're indicating in our guidance that we feel confident that we can hold the guidance for the year. Gina, do you want to add something to that?

My only question, when you say lower annual rate for the year, lower than the 3.2% that we posted in Q1. And we added a slide to the presentation, slide 12, to give everyone kind of a sense for the seasonality, the historical seasonality that David was talking about.

Thank you.

Your final question comes from the line of David McGregor with Longbow Research.

Yes. Good morning, everyone. I guess a couple of questions. First of all, you referenced the raw material logistics inflation is down. Can you just remind us on the extent to which that's hedged or locked in at this point versus variable? I'm just trying to get a sense of how much risk there might be over the balance of the year in those factors.

From a raw material standpoint, keep in mind that we don't buy a lot of raw materials themselves. We're buying the gadgets and the gadgets that come from the suppliers. So I would say from a hedging standpoint, it's not a material risk or opportunity for us on the raw material line, I would say. As we look to the balance of the year and what we saw play through in Q1, we've absolutely seen the metal markets come back down. And they're bobbing around a little bit, but we've kind of taken that current forecast out for the rest of the year. And we do expect to see logistics rates continue to stay low. They're much lower than where they were last year, particularly within the ocean freight. As we talked about last quarter, we're continuing to see inflation within the labor rates and the warehousing. So You know, overall for the year, we're not seeing too terribly different inflation outlook than what we talked about last quarter.

Right. Right. Okay. Thanks for that. And then I guess we should get a live wire question in here. So maybe a question for Ryan here. But, you know, you mentioned that you've got sufficient cash and liquidity for 2023 business plan. But, you know, we've got a slowing macro here. We've already sort of talked about consumer sentiment. What gives you confidence that you can continue to fund development at the rate that preserves your market leadership in that product category?

Yeah, thanks for the question. I think a couple things. I mean, as you stated, we look at the first quarter here in particular, I think, you know, largely in line with our expectations. As you stated, the macro environments contributing to that. But I think as we look at the long term, of course, the important part for us to stay on track is to just continue with the product development and then continue to grow the units. And key to that, of course, is the product development on the Del Mar side, which we just released this past week. And we're quite pleased with the reception to that bike. It's obviously a very important strategic pillar for us going forward. And then, of course, the introduction into Europe. So we think with the two of those things, we continue to get greater scale, which, of course, improves the overall economics. So the combination of that and then obviously the starting cash position and our burn rate at this point, we'll comfortably continue with our plan and stay on track.

Are you still comfortably on track with the plan if you end up at the low end of that shipment range that you've got in the guidance?

Yeah, even at the low end of that guidance, we had a similar cash burn. So we'll still be on track and within the parameters of the plan.

Okay. Thanks very much.

Your next question comes from the line of Brandon Rowe with DA Davidson.

Good morning. Thank you for squeezing me in here. Just a quick question on the new versus used pricing gap. Could you talk about what you're seeing this year in terms of that gap and how it might have changed with use values, you know, taking a pretty big drop to start this year versus prior years. And then maybe also talk about just the availability of used inventory in the market right now. Thank you.

Thank you for the question. So certainly we are seeing some moderation in that, as you mentioned in terms of the price gap, but certainly still above historical levels. Overall, the dynamics in the used and the new market are different this year than in prior years, given the higher availability of new. So, we certainly expected some of that shift, and it is playing out as such. Obviously, for us, use is a very important part of the overall ecosystem, and maintaining a healthy used market is part of how we continue to build growth in the new market. But certainly, there is a different dynamic this year than in prior years. So, we remain, I think, with a healthier dynamic than we would have seen in historical terms.

Okay, great. And just the availability of inventory there, are you seeing more entering the market or is it in line with prior years? Thanks.

I would say it's largely as expected. Again, the dynamic of the past couple of years has been a little bit different than we would have seen historically given some of the production interruptions of the past couple of years. So some of that is working itself out as we go through the year.

And bearing in mind that have, especially now for the first quarter, much healthier new inventory available in the dealerships.

Great. Thank you.

You have a follow-up question from Robbie Ohms of Bank of America.

Oh, hi. Thanks for taking my question. So I think this is for you, Gina, because I This is, I guess, your last call with us with Harley, and you will be missed. But I was hoping you could talk about the gross margin outlook for HDMC. The even margin guide, obviously, with what you put up in the first quarter implies moderation. The gross margin for HDMC in the first quarter was pretty incredible. Can you just help us understand, you know, what gross margin, how we should be thinking about gross margin trends off of that incredible first quarter gross margin you guys put up through the next three quarters within the guidance.

Absolutely. Thanks for the question. Yeah, Q1 is definitely going to be the strongest margin quarter for us. We really had everything going our way in terms of strong unit delivery. The mix of those units was very, very favorable. From a pricing standpoint, we still have the benefit of both model year 22 pricing that went in mid-year in some of our markets, plus the model year 23 pricing. And then from a productivity standpoint, we're on track and that, you know, offset the cost inflation that we were seeing. As that supply chain, as the broader supply chain has started to stabilize out a bit, we did see expedited shipping rates come down pretty substantially in the first quarter. So we kind of had all of the factors were really firing on all cylinders, which led to that big margin gain. As we think about then the balance of the year, overall, we still feel pretty comfortable in the guide that we've given. And some of the factors that were positive, so like NICS as an example, was very positive in the first quarter. That will kind of settle out as we move through the back half of the year. Still end slightly positive for the year, just not quite as positive as what we had in the first quarter. The same thing I'd say for pricing. So pricing in Q1 will be the biggest impact. And then we start to lap the model year 22 pricing in Q3, Q4. So, again, pricing is still positive for the year, but the impact of that kind of will lessen as we go throughout. The negative, probably the single biggest negative besides cost inflation in the front half of the year is going to be foreign exchange. That starts to become more neutralized as we move through the back end of the year. So some puts and takes. But if you think about the overall margin guide, I'd say it's weighted to the front half. with a little bit of margin growth in the back half, but it will definitely be front half bulleted.

That's really helpful. Thanks so much, and best of luck with the riding season.

Thank you.

You have a follow-up question from James Hardiman with Citigroup.

Hey, thanks for fitting me in. The two follow-ups for me, on HGFS, that 3.2%, Obviously, you're saying you think that's going to come down over the next two quarters. What does that number need to look like for the year to be consistent with how you've ultimately guided HCFS? I guess most notably that 5.1 provision rate seems to be the big sort of driver there. And then on the retail side, I think you've made some comments that launch timing may have negatively impacted retail. And so maybe there's, you know, even though wholesale was essentially the same and maybe a little bit more inventory build, some of that retail benefit won't be until the second quarter. I'm hoping you can sort of tease that out as I think about how you framed retail, right? Some timing and then there's some consumer mindset stuff. Obviously the latter is, is, uh, It's pretty difficult to handicap, but maybe the timing piece is maybe a little bit easier to quantify.

Sure, James, I'll take that first part of the question and then I'll turn it over to Adele. But for HDFS, so we started at 3-2. You know, without giving you a precise number, what I'd say is embedded in our guidance is called a mid-2s loss rate for the year. So that's what we feel that we can absorb that within the guidance levels that we've given.

Yes, and on the retail question, so I wouldn't say that we have necessarily shipped significantly ahead in wholesale versus what we expect in retail. I think we certainly have a healthier inventory position as we have discussed as we go into this writing season. The point specifically on anniversary models, the CVOs, and even some of our new models is contrary to previous years where we would have had potentially all of that inventory in the dealership to start the writing season, we are deliberately shipping that throughout the year. So, you will actually see both the wholesales and the retails as we go through Q2 and Q3 for anniversary models, for some of our new models, as well as certainly for the CBOs, which will come in the back half of the year. So, just the overall cadence of how the product is working its way and rippling its way out through the network is very different than what we would have seen historically. And then I did want to note, just reiterate the point around the Sportster that Jochen made earlier. This is a product that we are sunsetting. We are still, obviously, there are retails, but these are significantly lower as that product sunsets. And there is an expectation that our ResMax platform over time, as it evolves, will become sort of will grow to match some of that volume. But that dynamic certainly was a component of Q1 as well. And it will evolve over the rest of the year. So I would say it's less about us pre-positioning the wholesales versus the retails. And overall, the cadence just looks very differently than we would have done it historically.

That's really good color. Thank you both, and Gina, good luck at your next stop.

Thank you.

There are no further questions at this time. I would now like to turn it back over to Jochen Zietz for some closing remarks.

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 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.

This concludes today's conference call. You may now disconnect.